Small Cap Value Report (Tue 11 June 2019) - BPM, MOTR, TED, TRI, IGR, CAR, QUIZ

11th Jun '19 by Graham Neary

36 comments 11356 reads

Good morning!

There is no shortage of news today. Due to time constraints, we are covering:

B.P. Marsh & Partners (LON:BPM) - final results
Motorpoint (LON:MOTR) - final results
Ted Baker (LON:TED) - trading update
Trifast (LON:TRI) - preliminary results
IG Design (LON:IGR) - full year results
Carclo (LON:CAR) - strategy update
QUIZ (LON:QUIZ) - preliminary results

B.P. Marsh & Partners (LON:BPM)

Share price: 308p (pre-market)
No. of shares: 37.4 million
Market cap: £115 million

Final Results

(Please note that I have a long position in BPM.)

This is a private equity vehicle specialising in the insurance industry. It has a great track record and my positive impression of management led me to make it a smallish position in my portfolio last year.

Indeed, I've added to my position this morning, using some of the proceeds from my disposal yesterday.

Key points

NAV per share has increased by 3% to 350p. It should have done better than that, but it was held back by a large placing at 252p last June. The dividend is also a headwind to NAV growth.

The June placing brought in an Australian insurance group called PSC (ASX:PSI) as a strategic investor. The relationship with PSC is said to be progressing well.

As for its investments, the underlying portfolio seems to have worked hard for BPM during the year. Pre-tax operating profit is £12.2 million, boosted by £14.1 million in unrealised gains on its portfolio.

That's a 16% improvement in unrealised gains compared to last year, if we strip out the effect of a change in valuation methodology which artificially increased 2018's results.

The method

Most of BPM's assets are valued using a multiple-of-earnings method. So when the investees become more profitable, this translates to higher valuations on BPM's balance sheet and unrealised gains on its income statement.

This is a source of significant uncertainty: the NAV is a matter of opinion, basically. Investees have to be separately valued based on BPM's view of what the appropriate earnings multiple for each…

Unlock with Email

Unlock with Google

Already have an account?
Login here

Paul Scott

11th Jun '19

Good morning!

As there are a lot of announcements today, I'm helping out with 3 company sections. Here's the first:

QUIZ (LON:QUIZ)

Share price: 22p (down c.20% today, at 13:14)
No. shares: 124.2m
Market cap: £27.3m

Preliminary results

QUIZ, the omni-channel fast fashion brand, is pleased to announce its unaudited preliminary results for the year ended 31 March 2019 ("FY 2019").

We already knew that this low-end fashion retailer (which focuses mainly on women's special occasion wear) was having quite big problems, with a series of profit warnings.

As you can see above, profitability has collapsed, down 94% to not much above breakeven. This looks to be slightly below consensus forecast, but not enough to make that much difference.

My main concern is the run rate of half year profit/losses, here's a simple table I've collated;

As you can see, in the previous 2 years, Quiz was actually more profitable in H2 than H1 (as I would expect, since H2 includes the autumn & Xmas party season). Yet in the most recent year, reported today, it swing to a heavy loss in H2.

Therefore, if we assume that H1 & H2 revert to being similar, in terms of profitability, then this suggests the business could be loss-making going forwards.

What's gone wrong? We don't really know, this is the problem. The narrative today mainly talks about soft market conditions, low consumer confidence, low footfall, etc. . However, it also tacitly admits there were problems with product design too, by saying;

"Re-aligning the product offering to our core customer demographic"

All the measures being taken are sensible, and quite basic, to put things right, e.g.

Cost-cutting of £2-3m (is that enough?)

Gross margin - fell from 63.0% last year, to 60.7% this year - which is still a very good gross margin - the business really should be able to make a decent profit on a 60.7% margin, but isn't. Why not?

International growth is continuing. Why? Surely this is a distraction for management? I'd be pushing for the business to go online only, and close all the shops.

Online has growth 34% y-on-y to 31.4% of total group sales. Growth through Quiz's own websites was excellent, at 54% y-on-y

Dividends - suspended, which makes sense in the circumstances. This is a turnaround recovery share now, not an income share.

Dept Store concessions - are being reduced, which is sensible.

No mention of store LFL sales performance, but crudely, space was up 9%, and sales up 4%, so LFL probably somewhere in the ballpark of -5%, on a lower gross margin, and with higher operating costs (wage increases in particular, affecting all retailers)

Balance sheet - still strong, with £7.5m net cash. I don't believe there is any insolvency risk at present. Although we saw with Bon Marche how a strong balance sheet can quickly be overwhelmed by a disastrous downturn in trading. Note that £1.2m of website development costs were capitalised.

There's masses of useful commentary in today's RNS. I've read all of it, but would take too long to write it all up here. Generally I agree that everything they are doing to turnaround the business looks sensible. So I think there's a reasonable chance that Quiz could indeed be turned around, getting back into perhaps modest profitability. Upside case might be that it recovers to say £4-5m profit. Not madly exciting. To my mind, Quiz just isn't a very good brand. A lot of its product looks tacky, and I think the tie-up with TOWIE was a big mistake. At the trashy end of the market, it's difficult to see how Quiz could compete with BooHoo or PrettyLittleThing, and their ultra-low prices.

Founder family ownership - still have a controlling stake, so will want to turn Quiz around. Experienced rag traders. Previously went bust, so they're now paranoid about long or onerous leases which is good. Deep pockets from IPO proceeds (£90m-ish), so could buy it back on the cheap.

My opinion - at such a low market cap, it's tempting to pick up a few here.

The problem is, what are we actually buying? A business that is now almost certainly trading at a loss, on an annualised basis, and needs a lot of sorting out.

I can't really analyse the business properly, because they don't split out the profitability by division. We don't know if online is making a profit now. It's growing fast on Quiz's own websites, so there might be an opportunity to close the shops & concessions, and just run it as online only? We're not give the figures though.

Stores - have short leases, so it will be able to exit the problem stores fairly soon.

Insolvency risk is currently very low, with net cash of £7.5m, but if they have another couple of disastrous seasons, then that could emerge as a future risk.

On balance, I can't make my mind up. It's tempting to pick up a few, given how low the market cap is.

Bull case - cheap, and well-funded. Experienced management could deliver improved trading later in 2019, giving maybe 100% upside from the current price.

Bear case - confidence in management must be shattered with people who bought in at the IPO. Current run-rate of trading could product a substantial loss in FY 03/2020. Tacky products & imagery on website = weak brand. Maybe Quiz isn't up to the challenge of competing with BooHoo, Asos, etc.?

mojomogoz

David

We've spoken before re Taptica International (LON:TAP). I bought this year around 130p before the RhythmOne merger. Fairly eventful ride so far.

There's a lot information and understanding gap that needs to be filled in on the company. Its impossible to estimate performance this year with any sort of accuracy. There's plenty bad news floating around too. IMO this seems to be in the price including this event too as their has been a fear of ad fraud connected stuff.

Its uncomfortable but the reason I'm in is I cannot weigh Taptica as a growth opportunity but the evidence appears strong that it has a viable business and good internal processes and management (cash produced, acquisition done at bargain prices and integrated well and quickly) so as controversial value play the opportunity appears good.

Given the above I expect a huge amount of uncertainty and volatility as clarity arrives (perhaps with writedowns of RhythmOne assets). The negative narrative about the stock could be correct...but it is also well practiced and somewhat backwards looking (as implied by stock price). My inclination is to top-up on significant weakness and this such an opportunity but I will wait for more news. I might not catch the bottom...and the bottom may be further down when half year comes if they do write down assets....but I feel that Taptica is a stock that will slow to bounce back from wounds as so roundly disliked that I might as well hold tight and watch a bit.

Uncomfortable...but that's typical for me!

SundayTrader

Not a small cap by a long chalk, but the results from Halma (LON:HLMA) highlight a dilemma faced by a lot of us - do we continue to hold a stock like this - there are others - which is on what I consider an excessive PER, but where do I find a replacement investment with similar quality metrics and a similar track record? I hold, and looks like I will continue to hold.

Good morning! I'm working through results from QUIZ (LON:QUIZ) and have a half-written section on that in another tab, so will post that here later.

In the meantime, some comments from me, for inclusion in Graham's main report;

Carclo (LON:CAR)

Share price: 20.2p (down 8% today, at 11:39)
No. shares: 73.4m
Market cap: £14.8m

Wipac strategy update

Carclo plc ("Carclo" or the "Group"), a global manufacturer of fine tolerance injection moulded plastic parts mainly for the medical, automotive lighting and optics markets, issues this strategy update ahead of the Group announcing its results, for the year-ended 31 March 2019, on 23 July.

I'm very concerned about the way things are going here, and think this share is extremely high risk, as explained here on 3 Jun 2019.

Today's update says;

Recent trading and net debt levels have been "broadly as anticipated"

Technical plastics & Aerospace divisions performing strongly, but

Wipac business - losses have worsened

Wipac costs are increasing to meet growing customer demand

Wipac - trying to exit new market (lighting for mid-volume vehicles), as doesn't have the working capital to support this growth (and by implication the bank isn't prepared to finance this growth)

" Once implemented, the revised strategy is likely to have the effect of reducing Wipac's future sales revenue but would also, consequently, significantly reduce the Group's cash requirements for working capital and capital expenditure."

Bank financing - sounds precarious;

"In the meantime, and as previously announced, discussions remain on going with the bank and other stakeholders in relation to the refinancing of the Group's borrowing facilities due to mature in March 2020. An interim Chief Restructuring Officer has been appointed to assist with these discussions."

My opinion - I don't like the sound of this at all. Things sound like they could be on a knife edge. Possible outcomes might include heavy dilution from an emergency equity fundraising, and possible withdrawal of bank funding (although that's very unusual for listed companies these days). There could also be a forced disposal of some (or all) subsidiaries.

Therefore in any of the above outcomes, equity could end up worth nothing. I wouldn't go near this one, as the risk of a 100% loss looks quite high.

Vsihv

No position, but from what I can gather, B.P. Marsh & Partners (LON:BPM) is insurance brokers as opposed to insurance companies and they ought to have a higher earnings multiple given lower capital requirements and are effectively trading businesses.
If they were holding insurance companies outright, I expect they would be more focussed on p/b and p/tb as well as return on equity, which I understand is reasonably correlated with p/b in the valuation world (eg Prudential (LON:PRU) (I hold) 18% ROE at 2.8x book - double Aviva (LON:AV.) ROE and book)

Could be wrong - have only looked at the stock report which is not the most useful for this company! Other reasons could be diversification / exposure to other regions

andrewdb

I have been waiting for HMLA to be 'reasonably priced' since mid 17.

Looking at recent performance (excellent company and has been for decades) of the SP, all I can think is 'this is nuts, when is the crash'

Trident

I saw an interesting article yesterday in the FT's Alphaville online edition regarding Uber. Basically certain economists had reviewed the Uber effect, and found that it had been a vehicle for generating extraordinary private wealth, but had not disrupted technology (much of it which was being used already or was later adopted by competitors), it wasn't giving a price advantage over time, wasn't generating wealth or material income differences for its employees,and was only disruptive to the extent it played low-ball tactics against its competing platforms or taxi competitors in general.

You never know the political agenda of such reviews, but it strikes me that many platforms, of which I include Aibnb are getting away with tax advantaged approach, often based on a semi legal basis (hotels have to provide fire security, health and safety, insurance cover etc, pay employment tax etc) that society and Govts are still barely catching up with.

Here's a section on IG Design (LON:IGR)

Share price: 600p (down 0.7% today, at 11:58)
No. shares: 78.3m
Market cap: £469.8m

Full year results

IG Design Group plc, one of the world's leading designers, innovators and manufacturers of Gift Packaging, Celebrations, Stationery and Creative Play products, Giftware and related product categories announces its results for the year ended 31 March 2019.

Sparkling results today from this group. I'm surprised the share price hasn't really moved.

Adjusted EPS is up 33% to 29.3p - giving a PER of 20.5 - not cheap, but surely justified given the strong profit growth.

I can't find any new broker forecasts unfortunately. Looking on Research Tree, there's a note from Progressive Equity Research from 15 Apr 2019 estimating 27.0 adj. EPS. Stockopedia shows 26.9p EPS forecast, almost the same. So the actual of 29.3p looks a comfortable beat against expectations.

Dividends - final divi up 50% to 6p. With the 2.5p interim divi, that gives a yield of 1.4% - not very exciting, but rising quite rapidly.

Outlook - key bits say;

...we are greatly encouraged with prospects for this trend to continue in 2020 and beyond...

We are excited by the positive start to the new financial year and the potential to drive the business forward through compelling M&A opportunities.

Exceptional items - large this year, at £8.4m - mainly restructuring charges

Balance sheet - looks better, since an equity fundraising was done during the year.

Cashflow statement - looks fine. A genuinely cash generative business, which is making acquisitions.

My opinion - looks a very nice business, that has performed extremely well in recent years.

The valuation reflects this, and looks about right to me.

rhomboid1

Re Carclo (LON:CAR) I think the bank is potentially already in charge...reason being they apparently appointed

https://www.fticonsulting.com/services ...as their details appear on the bottom of the RNS ...they no doubt have provided the restructuring consultant referred to in the RNS ...this is often done at the behest of the bank where foreclosure by them is on the cards

Here they’ve granted a covenant waiver...but I’m guessing FTI were part of the deal...as you say possible wipeout for shareholders...

unwise2

Sparkling results today from this group. I'm surprised the share price hasn't really moved.

Adjusted EPS is up 33% to 29.3p - giving a PER of 20.5

There seems to be no logic at the moment in the market when it comes to PER's. I agree based upon IG Design (LON:IGR) results you would expect a reaction in the share price. There are several mature mid/large cap shares that have low to moderate growth that currently have high PER's, Halma (LON:HLMA) being one of them. From memory others include Craneware (LON:CRW), Spirax-Sarco Engineering (LON:SPX), Rightmove (LON:RMV), Auto Trader (LON:AUTO), Games Workshop (LON:GAW) and AJ Bell (LON:AJB) with expected EPS growth of circa 20% on a FWD P/E of 55.

riosurfer

Good analysis. Thanks. Agree marketing is not good enough. But hope they improve the marketing rather than reduce it. Key for this business is product - this is the biggest driver of customer engagement. What's the plan to improve this?

shanklin100

Great facility with the Somero Enterprises Inc (LON:SOM) AGM web-site, whereby all participants are able to type in questions... ...and having done so... I can confirm management are providing responses to said questions

Started at 2 p.m. and probably wrapping up shortly by the sound of it, as they run out of questions to answer.

Listened into Somero Enterprises Inc (LON:SOM) call. I don't own but have thought about it in the past but just can't get comfortable that I'm buying upside surprise. TU with implied profit warning is perhaps an opportunity. For any bulls in the room I have a puzzle for you to answer to perhaps convert me:

Based on guidance given in recent trading update I estimate $11m operating cash for 2019 which is a big step down from $24m in 2018 and $20m 2017.

This comes from estimated $7m step back in revenue due to poor weather.

Started from YE18 $28m balance, subtract $14m div in April, take away extra $4m planned investment in new plant in FY19 plus estimated interim dividend worth $3m => add back $11m of net op cash (assume all else equal) to get to companies guided $18m cash balance.

Do you agree? Does this make sense? Rev only pulling back $7m on guidance yet op cash down $13m - meaningful negative op leverage into cash earnings. What’s causing this?

For sure its only guidance with uncertain current operating conditions due to weather but given the op margins of business and no other extra costs disclosed it seems larger than it should be. A further pull back in revenue would see the dividend under pressure given the negative leverage.

(Note: I have tendency to buy things once they have gone wrong as happy to be a bit contrary plus I feel I can see what's really going on when there's tough stuff going on so smooth sailing Somero a tough one for me)

Graham Neary

Hi SundayTrader, I'm sorry there was no time for CML Microsystems (LON:CML). G

Cockerhoop

Somero Enterprises Inc (LON:SOM)
Finncap have a $4m working capital outflow, capex of $5m, tax of $7.4m, acquisition of $2m and dividends of $17.6m

So working cap outflow is explanation plus I missed the acquisition on my fag packet. That gets to my $6m drop down.

Working cap a bit of drag in prior two years (not much). Shouldn't a revenue slowdown bring them positive working capital? Being so early in the year they have long inventory adjustment (they went into year inventory heavy) and the relative pause gives them time for a bit of catch up in receivables if necessary?

I'm asking rather than being certain about anything

Taptica International (LON:TAP) hammered into the close. Last 45 mins or so saw loads of volume that took price down.

Seems like an institution selling? AGM Thursday. Nervy. I'm possibly being foolhardy but this seems overdone on back of speculative Uber case. There needs to be a big smoking gun and operational woes to justify the price IMO

davidjhill

Somero Enterprises Inc (LON:SOM) it was the special dividend that takes starting cash from $28m to $14m. So $18m is a cash inflow for the year of $4m after interim and capex as you noted.

Mojo - re Taptica International (LON:TAP) - looked like some US selling action that hammered the price, either an insti or some short selling. However, only 6m shares traded - that's £7m worth of shares causing a £60m market cap drop, so suggests the fall is predominantly down to low liquidity and over-reaction.

Strip out cash and this is now trading on 1* expected earnings !!! It's definitely priced strangely at the moment. As you say it's either going bust because there is something dramatic underlying this that we are not being told or it is phenomenally cheap. At this price though one wonders whether it is the former. They need to think very hard about the AGM message I'd say.

Taptica International (LON:TAP) - I know I could feel very stupid in a few days...why do I get myself in these situations! ;)

Actually, I'm not that uncomfortable...for sure not happy...but what's happened is not a big surprise. The selling at the end was almost like someone wanted the price down. I'm not being conspiratorial just saying rather bizarre really and quite a lot of stock in clumsy way crammed in at end of day. I had buys in at around 75p looking to take me back 2/3 of the way to whole position (at 130p). I see all the bad news but it seems like very extreme sentiment into a messy situation as earnings are obscured through RhythmOne acquisition and the Tremor Video related business transformation too (I believe both these things are the right strategy).

Perhaps serendipity saved me by not filling me. I wont bid at the open tomorrow just as need to see and feel what happens.

At beginning of year expected profit for Taptica and RhythmOne came to approx $80m. Taptica then warned on part of its business so that's a ratchet down and then RO expectations were probably a bit toppy. I think that $55m for 2019 is ambitious at least on a clean basis as RO will bring some write downs (Taptica CFO has already hinted that when speaking to him).

The Uber case even if there is a settlement can probably be paid comfortably. Bad headline news but new mgt and new products and its in the past. If developed into full blown criminal then I'll have a hard time getting my money back.

Will be interesting to see the RNS come out and what's happening. Plus if the legal has escalated then we should get whiff in broker note tomorrow.

I know that most have me down as foolhardy on this as others have had the burn and talked about it before me....but I think I'll see myself whole and then some from here.

Tin hat on

Small Cap Value Report (Tue 11 June 2019) - BPM, MOTR, TED, TRI, IGR, CAR, QUIZ

B.P. Marsh & Partners (LON:BPM)

Unlock the rest of this article with a 14 day trial

About the Author

Graham Neary

36 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...