Small Cap Value Report (Tue 11 Apr 2017) - NXT, VCP, RFX, SEPU, PAM, TST, XPP, CALL

Tuesday, Apr 11 2017 by

Good morning! It's Paul here.

Both Graham and I will be working today. Graham will be emailing me his sections, which I'll include in this single report, marked clearly as being written by him.

Retail sales volumes

Over the weekend, I was looking at some data, showing that the latest retail sales volumes have apparently fallen about 2%. This seems to have cast a cloud over consumer spending related shares.

However, the way I see things, consumers only have a certain amount of money to spend. Therefore, when inflation starts rising, as it is now (due to the fall in sterling), then one would expect consumers to continue spending roughly the same amount. However, that amount will actually buy a smaller quantity of more expensive items.

From the retailer's point of view, this shouldn't really matter very much. In such a situation, LFL sales would simply be flat. Fewer items are being sold, but the prices have gone up, so the retailer ends up achieving the same overall sales figure. Moreover, with lower volumes of goods being sold (at higher prices), the retailer will actually achieve some cost savings - e.g. fewer plastic bags being used, savings on staff rotas, warehouse costs, etc.

Next (LON:NXT)

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

Next puts out the most detailed forward guidance in the sector, and its guidance for 2017 is extraordinarily pessimistic. Its central guidance for LFL sales is minus 7%. Now bear in mind this is after the company will have raised selling prices by 4-5%, then this means that Next is forecasting a massive drop in sales volumes of something like 12%. That doesn't seem very likely to me.

At just over £40 per share, Next seems a remarkable value opportunity to me. The Directory business is now more profitable than the stores, so it's effectively a growing, internet-based business. Yet strangely, the market is ignoring this, and treating the entire business as if it's a declining, old economy business.

Including pre-announced special divis (covered by cashflow generation), the dividend yield is now approximately 7-8%. The forward PER is about 10, but that's based on really pessimistic forecasts. The company has a history of starting the year with very gloomy forecasts, and then pleasantly surprising later in the year.

It will be fascinating to see how this year pans out. To me though, the current…

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Victoria PLC is a designer, manufacturer and distributor of flooring products. The Company's principal activities are the manufacture, distribution and sale of floorcoverings. Its segments include UK and Australia. It manufactures wool and synthetic broadloom carpets, carpet tiles, underlay and flooring accessories. In addition, it markets and distributes a range of luxury vinyl tile (LVT) and hardwood flooring products produced by third-party manufacturers. Its product offering in the United Kingdom ranges from both crafted, woven Wilton carpets to Tufted carpets in a myriad of fashion colors and styles. Its stock range offerings cover saxonies, tonals, velvets, twists and natural loop pile styles for residential use. The Company supplies its products to the mid to high end residential market and contract sector both in the United Kingdom and overseas. Its subsidiary, Munster Carpets Limited, is engaged in the manufacture and distribution of floorcoverings for the contract market. more »

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Ramsdens Holdings PLC (Ramsdens) is a financial services provider and retailer. The Company operates through four segments: Foreign Currency Exchange, Pawnbroking, Purchases of precious metals and Jewellery Retail. The Foreign Currency Exchange segment consists of primarily, the sale and purchase of foreign currency notes with prepaid travel cards and international bank to bank payments. The Pawnbroking segment is a form of asset backed lending where an item of value is given to the pawnbroker in exchange for a cash loan. Through its precious metals buying and selling service, Ramsdens offers to buy unwanted jewelry, gold and other precious metals from customers for cash. The Company is engaged in refurbishing items bought from customers and retailing them through its store network. The Company also provides ancillary services, including franchise fees, western union, sale and buy back of electronics, and credit broking. It has a portfolio of over 130 stores. more »

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Sepura plc is a provider of communications solutions. The Company is engaged in the design, development and supply of digital radios, infrastructure and applications for Professional Mobile Radio (PMR) users, providing specialist solutions for the public safety, transportation, oil and gas, mining, utilities, industrial and other commercial sectors. It offers terrestrial trunked radio (TETRA), digital mobile radio (DMR), Project 25 (P25) and long-term evolution (LTE) system solutions. Under TETRA, it offers systems infrastructure, applications, hand-portable radios, covert radios, fleet management, modem and accessories, among others. Its suite of control room applications includes dispatchers, automatic person location (APL) and in-building tracking. Its DMR radio systems include DMR Tier II, which links approximately 30 repeaters; DMR Tier III, which links over 1,000 sites, and Dispatcher applications, which provide call logging and call management. more »

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

41 Comments on this Article show/hide all

Lion Tamer 11th Apr '17 22 of 41

In reply to post #179562

Hi FREng

I'd have thought cloud & blue sky were mutually exclusive, but it could still be a high flyer.

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Aislabie 11th Apr '17 23 of 41

Any thoughts on Defenx (DFX) which reported excellent results today, confirming a growth trend and adding to this with the announcement of an acquisition?
All good, but can anyone explain the extraordinary accounts receivable which at €5.5mm are a large part of the €7.0mm sales figure.

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ricky65 11th Apr '17 24 of 41

Paul, you perked my curiosity when you stated that the quoted prices are often not the actual prices. I experience this myself, I often find with small caps I can buy and sell within the spread.

Am I right in saying that the stated Bid and Offer are the best Bid and Offer from at least one Market Maker? (i.e. other hidden (DMA?) orders are excluded) In that case I wonder why they don't take into account hidden orders when determining the best Bid and Offer. The current system seems disingenuous and cockeyed to me.

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Paul Scott 11th Apr '17 25 of 41

In reply to post #179570

Hi GrahamFraser,

Absolutely. I can also give another example today of the Market Maker quoted prices, and actual prices, being wildly misleading.

Altitude (LON:ALT) shares have been sliding, so I was considering a top-up (only a small, speculative position).
The quoted Bid-Offer price was 50p/56p. Anyway, I asked my broker for the real prices, and he said that Winterfloods were actually bidding 54.5p for 100k shares! Yet that bid was completely invisible to private investors.

Anyway, on that basis, I took out the MM who was on the Offer at 56p, and he then came back with a refreshed price at 59p, having been caught napping!

This is another example of where the published prices are totally misleading!

I think we ought to campaign to have more transparent pricing, as the published quotes are simply not the truthful, real prices, quite often in MM prices. We need to get the LSE to ensure that the RSP prices are published too, so that market participants can see what the genuine prices are. That would actually help improve market liquidity too.

Maybe it's something ShareSoc could look into?

Regards, Paul.

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mikelevie 11th Apr '17 26 of 41

In reply to post #179582

Hi Ricky, can you post a link to the Minervini webinar you mention? Very interested to join that.

Many thanks,

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gsbmba99 11th Apr '17 27 of 41

In reply to post #179568

As an addendum, it looks like Electra have sold out their remaining holding at 125p. The admission doc says that Electra would hold 8,523,109 shares on Admission and that precise number of shares traded at 125p at 16:49. So, they sold half their holding at 132p in the IPO and the remainder at 125p. Queripel still hold 33% and are subject to orderly market arrangements for a further 6 months.

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JohnEustace 11th Apr '17 28 of 41

In reply to post #179578

Hi Paul,
I guess most of us on here are more likely to be found shopping in Next than JD Sports. But to what extent, if any, should that impact our investment decisions? I wish I had overcome my prejudice and bought into JD sooner. When the charts looks like JD's and Next do, is it really better to buy Next?

I hope both are good investments - there's certainly a case for both but my money is staying with JD until I see signs of the sustained recovery in Next. Perhaps it's just a matter of timing as I'm never happy trying to call the bottom.

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JohnEustace 11th Apr '17 29 of 41

RE Touchstar (LON:TST)

"On a recent flight, I noticed that BA are using a new, and very clunky system, based on an iPad, which seems extremely slow, and ended up with them only serving a few passengers, and then abandoning cabin service, as it was taking too long. So I hope very much this wasn't TouchStar's system, but I don't know."

I've also seen the problems with that system and have a nasty feeling it could be Touchstar. The whole thing has been very poorly received by crew and passengers. If you look at the Touchstar website, BA are listed as a customer, and there are many pictures of BA planes and crew on the relevant page.

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JohnEustace 11th Apr '17 30 of 41

In reply to post #179596

Hi Mike,
I found a link here for the Minervini webinar and have registered. It's at 16.30 Eastern US time on the 18th.

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Leven 11th Apr '17 31 of 41

There is a very good, albeit slightly outdated, guide to quote driven or market maker stocks and RSPs from pg 34 of The UK Trader's Bible: The Complete Guide to Trading the UK Stock Market

As Dominic Connolly puts it "The majority of trades are struck within the market spread on the screen; screen prices should only be regarded as indicative. I call them tourist rates."

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Graham Fraser 11th Apr '17 32 of 41

In reply to post #179594

Hi Paul,
I completely agree,there should be much more transparency. I am sure market makers make the majority of their profit from individuals who pay or sell at manipulated prices. The institutions have their own dealers who can demand to be told the real price. I can think of many examples. Though you are right occasionally it is possible to benefit.
You must be lucky with your broker mine says that because of SFA rules he is not allowed to give me any advice and that includes telling me whether he thinks the market maker is telling porky pies or not.
I think it is something that should be looked into, it must be possible to enforce transparency.
Regards, Graham.

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jonesj 11th Apr '17 33 of 41

In reply to post #179562

I think it makes it an absolute nonsense stock. Unless they have a robot to deliver the food, they still need staff in the aisle. So it's just as easy to verbally order & pay the staff with cash or card.   

Having the staff use touch screens will just slow the whole operation down.    If slow service is the result, then it's another reason to avoid BA.

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roque22x 11th Apr '17 34 of 41

In reply to post #179578

Hi Paul,

Though I understand your concerns over the business model, I think this company still has further to go. As many have already pointed out, this a classic Minnervini stock, with it's share price trading well above its 50, 150 and 200 day moving averages. This company also seems to consistently beat market expectations.

Though Brexit uncertainty and inflation is a concern for the company, I would point out that the company has grown revenues in Europe by 67.6% and The Rest of the World by 203.7% in this financial year. Add to that their latest acquisition of Go Outdoors business and strong net cash position of 213.6m, leaves the company well placed for future growth. IMO this a company that is a hugely attractive investment, that is a market leader in it's sector.



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Reubencash207 11th Apr '17 35 of 41

Hi paul, great article, really enjoy reading your articles. Just to be difficult i would disagree with this point you made.

"From the retailer's point of view, this shouldn't really matter very much. In such a situation, LFL sales would simply be flat. Fewer items are being sold, but the prices have gone up, so the retailer ends up achieving the same overall sales figure. Moreover, with lower volumes of goods being sold (at higher prices), the retailer will actually achieve some cost savings - e.g. fewer plastic bags being used, savings on staff rotas, warehouse costs, etc."

For retailers that sell bare neccessities i would agree but for other retailers i would argue lfl sales will decrease. Although consumers will still spend a similar amount, the ratios of where that money is spent will change and so the absolute values spent by consumers on certain products will change. All consumers need to purchase food, petrol, pay for rent etc... the bare neccessities so these will come out of their product first, they cant choose to spend less on these. If inflation is driving these up then consumers WILL have less to spend on things like eating out, clothes and other consumer products a lot of retailers provide. Hense LFL sale would logically decrease. I agree costs for retailers may decrease though as a result, cushioning this.

Let me know your thoughts


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roque22x 11th Apr '17 36 of 41

In reply to post #179566

I wish you the best of luck, but I do feel trying to call the bottom is a risky game. In my experience the stocks that have performed better, have been ones with relative strength and trending. My best performing stock has been Trifast, which netted an 84% gain, that had been trending upwards after several good trading updates and a positive outlook. Somero plc is another company with bright trading prospects and positive momentum for example. Though understand the appeal in Next, especially with its attractive dividend yield and cash flows, I would not buy the share at the moment because the company share price is in a negative trend downwards. The outlook is not great either for the retail sector with inflationary growth expected to outpace consumer wage growth. I think this is pretty much reflected in the Next plc outlook for sales going forward.

Though I can completely understand the appeal in buying Next at it's attractive valuation, for me it is the case of how much could the share price drop under negative momentum? With future trading prospects looking bleaker at the moment, I can't see any significant reversal any time soon. In which case, the risk is that you buy into a falling knife. However all IMO and over the long run you could profit. For me it's just a case of I think there are better shares out there with better prospects for the future at the moment.



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ricky65 12th Apr '17 37 of 41

In reply to post #179596

Hi Mike

Here's the link for the webinar that is on Mark Minervini's twitter feed.

Regards, Ricky

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mikelevie 12th Apr '17 38 of 41

In reply to post #179670

Many thanks Ricky, all signed up!


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slibbertygibbet 12th Apr '17 39 of 41

In reply to post #179624

My guess is that Touchstar on BA etc is less a customer-service app, more a staff-control app – one that lets the company keep an eye on stock levels and ensure attendants don't hand out too many packets of peanuts. All of BA's moves recently have been like this – can't have the customers too much of a good deal, can we? 

Display ordering is the kind of system that really only works with seat-back displays (Virgin America does this) - as it saves having the attendants roam the aisles.

But even then it's clunky. It can take an age for the staff to pull the stock item out and deliver it - possibly because the software lets them pack a lot of different goods into a small space with everything IDed by code - but they have to get to the right bit of the box first.

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tonyboden 12th Apr '17 40 of 41

Hesitant to disagree with Paul on the subject of retail, BUT. I think you are being to relaxed on the impacts of inflation in this phase of the cycle. As consumer spending power is squeezed and increasing proportion is spent on essentials, leaving less yet for luxury / discretionary spend.

This is already being experienced but there's more legs to it yet as the inflationary impacts continue to feed through. Personally the Next (LON:NXT) downbeat revenue expectation seems pretty realistic to me, but Paul is not alone in not believing it. Hence I'm mostly staying well clear of "discretionary retailers" for the moment as I think there'll be an even bigger bargain opportunity in a few months time. 

I seem to see a lot instances where the market reacts to an outlook warning, but reacts even further when the outturn matches the prediction.

I'm hoping to have more detailed delve into consumer spending over the next few weeks.

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RustySpanner 20th Apr '17 41 of 41

As a new investor, and ex electronics engineer, I was interested in Paul's comments on XP Power so checked them on Glassdoor ( The comments suggest that it is not a well run company and could lose some of it's key workers and intellectual capital. How much weight should I give to this?

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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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