Small Cap Value Report (Tue 12 March 2019) - HAT, 888, FCCN, STAF, MTC | Graham Neary

12th Mar '19 by Graham Neary

36 comments 14936 reads

Good morning!

A couple of companies in my portfolio reported today, and we have plenty of other stories to discuss.

Today's list:

H & T (LON:HAT)
888 (LON:888)
French Connection (LON:FCCN)
Staffline (LON:STAF) (restoration of trading)
Mothercare (LON:MTC)

Trade update - I now own some long-term, deep out-of-the-money put options in Tesla. The effect of this trade is that I am betting Tesla's equity turns out to be worth nothing by 2021.

This probably won't happen, and the options will probably expire worthless, so I will lose all of the money I've invested in them. Just have to put my feet up and wait until 2021 to find out!

H & T (LON:HAT)

Share price: 294.9p (+3.5%)
No. of shares: 37.7 million
Market cap: £111 million

Preliminary Results

(At the time of publication, I have a long position in HAT).

This share has been in my portfolio since 2013. At this stage, perhaps it's fair to say that I'm a veteran H&T shareholder?

More good results for 2018:

pledge book up by 9.5% to £52 million, a fresh high
personal loan book up by 38% to £20.5 million
personal loan revenue after impairments up 80% to £7 million

The personal loan segment has been the biggest driver of growth, but nearly all operating segments showed encouraging progress. For example, revenue from foreign currency services grew by 24% (from a low base).

The company remains wonderfully disciplined as the number of stores increased by only one during the year, to 182.

H&T has resisted the urge to expand unprofitably, instead fine-tuning the profibability of its existing estate. Indeed, it has a slightly bigger store portfolio (c. 190) if we scroll back to 2015.

It says that it now has access to a "broader customer base", after improving its online channels with respect to both jewellery retailing and pawnbroking.

Traditionally, a pawnbroking customer was an older woman with dependants who had family jewellery items she could pawn to get through a temporary cash flow difficulty.

As the business has moved online, it's easy to imagine a younger audience that is more balanced between men and…

Unlock with Email

Unlock with Google

Already have an account?
Login here

InvestorJohn

12th Mar '19

For those of us in French Connection (LON:FCCN) for the potential of a take over this is the key paragraph in the results...

In October last year, following press speculation regarding the potential sale of the Group, we announced that we were in the process of reviewing all strategic options in order to deliver maximum value for shareholders. Alongside several potential strategic options, the review includes the consideration of all types of corporate and brand transactions, including seeking offers for the Group. As disclosed at the time, we had commenced preliminary discussions with several interested parties and have had conversations with several other interested parties regarding the Group's plans. The discussions are ongoing with a number of parties. We continue to expect this strategic review (including the formal sale process) to conclude during the first half of 2019 and will make further announcements when appropriate.

MrContrarian

My morning smallcap tweet: Sleep without Dreams

Concepta (LON:CPT), French Connection (LON:FCCN), Staffline (LON:STAF), eve Sleep (LON:EVE), Mercantile Ports & Logistics (LON:MPL), Water Intelligence (LON:WATR)

Concepta (CPT) to supply myLotus Walgreens Boots Alliance for women's fertility and hormone testing. Preparing EU market roll-out plans. No numbers.
French Connection (FCCN) FY small pretax profit at last, £0.1m (£2.1m). Rev flat, LFL down 6.8%. Net cash only £16.2m (£9.5m) despite selling 75% of Toast of £11.7m. Still in talks to sell group after 5 months. Expects strategic review (including the formal sale process) to conclude in H1 2019. Marks optimistic as ever: "I believe we are in a very good place and will make further significant progress." I hold.
Staffline Group (STAF) resumes trading after 6 weeks of worry for holders. "The independent legal investigation has delivered its key findings which has assisted the Board in assessing and defining the impact on the Group's profitability and existing forecasts." Looks minor. Exzceptionals inc by £3.5m over £20m announced in Jan. Expects FY in line with expectations and maintains its expectations for the current financial year. I hold.
Eve Sleep (EVE) FY rev up 25% but loss up 1% to £20.3m, 58% of rev. Ends Dreams 'partnership', impact not material. But in Nov it guided rev at or above expectations "helped by the early success of the Dreams partnership". CFO resigns but stay on until the summer. "The opportunity to create a sleep wellness brand remains undiminished." A great sounding PR-bollox soundbite.
Mercantile Ports & Logistics (MPL) the port is inaugurated and first (small) revenue but guess what, still awaiting customs approval.
Water Intelligence (WATR) FY rev up 44% and adj pretax $2.5m ahead of market expectations of $2.2m.

andrea34

Results from 888 Holdings (LON:888) are out, Graham, which I think you hold.

There are fairly decent looking pre-adjusted results out from Midwich (LON:MIDW) showing good organic growth, total revenue growth 21.6%, adj op profit up over 20%, and adj eps up 19.3% to 27.3. I'd be grateful for any comments, please - to me they seem reasonable value at 575 even on a current basis let alone prospects for 2019.

Contract win by SimplyBiz (LON:SBIZ) - Zest, its state-of-the-art, next generation employee benefits technology platform, has signed a five year contract with Aviva plc (no figures disclosed).

rmillaree

Staffline (LON:STAF) - returning from the " nearly undead".

bizarely it looks like they have come away relatively intact - as far as i can see its simply an additional provision with regard to legal fees of £3.5 mill. Working capital improvement progression this year and unchanged expectations for current year.

Strewth could the shareprice actually be up today - that would be a first for an investigation like this perhaps?

Note IMHO they were very tardy suspending shareprice in the first so its still a poor situation that things panned out as they did.

MGinvestor

Hi Graham,

in the spirit of always looking for a challenge for my holdings, can you please have a look at Water Intelligence (LON:WATR) if you get a chance. Very bullish trading update (although it's delivered late in usual style) stating that "results ahead of market expectations for both revenue and adjusted profits before tax". FY Results will be out in early May. Other than the corporate governence concerns people have previously flagged, is there anything else that could be a concern?

Many thanks!

donald pond

Those look like stellar results from Water Intelligence (LON:WATR). I picked up a few this morning but there aren't many around. A typical example of a share that has been sold down without regard to the underlying business.

888 Holdings (LON:888)
at present the stokopedia numbers show an estimated decline in net profits and EPS for 2019 of 10% + 15% compared to 2018 - this seems a little pessimistic compared to the tone of the announcement today. I note there are a few fairly chunky exceptional adjustments in the results - perhaps these explain the somewhat glass fully empty predictions in the stockopedia numbers - does anyone know if underlying trading is likely to be down 2019 compared to 2018?.

Collector

Re: GVC from the other day it would appear the directors sold shares have ended up in the hands of Merien Global Investors formerly Old mutual Global Investors therefore a 'trade' sale, to likely longish term investors.

Camtab

FCCN have at least returned to profit courtesy of their wholesaling business. Rather encouragingly the US has been the jewel in their crown this time round. Also as stated above the sale is still on the cards which is hopeful as I rather thought the prospect of said sale had diminished as buyers worked out Marks is at a stage of his life where driving FCCN isn't what it used to be. Perhaps this is an unfair perspective and the return to profit does mean buyers may be concerned at missing the boat. It is this point which slightly concerns me. Store closures continue although he does mention some of the terms which landlords are offering are extremely attractive, but they still seem to be stuck with the more onerous ones. Has anyone seen the average lease length? Marks promises more to come so I suppose for the time being I am a holder although more excited about the over reaction to Quiz!!

GrahamF

I’m sure Effortless Cool will be reiterating the bull case for Water Intelligence (LON:WATR) in due course as he has been a very strong advocate for it.

Taken at face value it does look like a business that is growing very successfully.

But I struggle to take it at face value (partly due to having received burnt cake at Patisserie Holdings (LON:CAKE) where it turned out results were to good to be true).

Apart from the corporate governance issues with the management, I cannot understand why their franchise holders are content to sell the franchises back to the corporate when it would appear they are sitting on a goldmine. Equally, if there is large growth from the insurance and municipal markets why don’t the franchise holders benefit from that? Is it because the USA is already saturated with corporate operated outlets? If not, how is the company able to say to these large customers that they can cover the whole country if they don’t allow their franchisees a piece of that work in the local area? It doesn’t make sense.

They would have us believe that they are a technology company rather than a service provider. I don’t buy that at all. The same acoustic etc technology is available to everyone.

I don’t believe that water shortages are really driving a step change in this market as the water efficiency driver has been in play with water users for well over a decade. (disclosure - I worked in industrial water management at one time).

Hopefully for those that hold my fears are just that and the business is sound. But it is on the too good to be true pile for me.

hawkipa

Morning Graham,

Pendragon (LON:PDG) FY 18 results out this morning, which I would be interested to hear any thoughts you might have on it.

Whilst on a PERf basis they continue to look cheap and have the asset backing of a freehold property, I am now changing my view that is this just a case of managed decline. Operating margins are reflective of a low quality business. Whilst their strategic aims remain to increase used car volumes as new car volumes decline, is this not just a case of increasing volumes in one low margin business to compensate for a fall off in another low margin (but possibly slightly better) business area?
The SaaS business proposition looks interesting, but remains too small to really be of great value within the wider group. Plus, is it not just an order management system for other dealers who are facing the same pressures as the wider group? The international angle is the opportunity here, but even with big growth it does not seems to represent a significant enough shift to represent a compelling opportunity?
The leasing business is also showing good growth with good margins. It also provides an ongoing source of used vehicles, but there is no enduring competitive advantage that I can really see here either.
The pension liability has ticked up a bit, but is still down substantially over recent years, so is not a concern. They have also continued to buy back shares to the tune of £6.7m in the last year, which is perhaps provided a floor to the SP, but this has now been paused, with an ambiguous statement that it has been paused, but can be re-started, which is less than helpful in the clarity stakes. The dividend payment is still a worthwhile amount, but increasingly its sustainability has to come into question I presume.
Have been a holder for some time, in the belief that the mix of cheapness and overly negative expectations of new car sales would eventually reward my patience, I am now, well losing patience and would be interested to hear the bull case, which I used to believe in.

Regards
Paul

LeoInvestorUK

Graham F, re: Water Intelligence (LON:WATR) ,

I sold out a year ago at 231p due to a bad feeling created by the rampy language used in RNS statements at the time and the relatively high PE. Looking back, another reason may have been that I had made 60% profit in less than 4 months and didn't want to lose it. Clearly not the most "watertight" reasons for selling.

Perhaps today's figures show that the exuberant language was fully justified? Yet, looking at the fundamentals, the lack of free cashflow stands out as a reason for continued suspicion.

Overall I have to agree with your concerns. I'll go further and say I believe there is probably something wrong with the accounting here, albeit more on the lines of accesso Technology (LON:ACSO) than Patisserie Holdings (LON:CAKE). However it could be years before whatever it is comes to light.

Effortless Cool

Hi Graham,

I’m sure Effortless Cool will be reiterating the bull case for Water Intelligence (LON:WATR) in due course as he has been a very strong advocate for it.

And here I am, right on cue. You make some fair challenges, to which I will try and respond.

I cannot understand why their franchise holders are content to sell the franchises back to the corporate when it would appear they are sitting on a goldmine.

"Goldmine" is perhaps overstating it. The franchises are generally small businesses, for example, the latest one reacquired had annual revenue of $320k, and the underlying growth rate is c. 5%. Also, they are generally run by small businessmen for whom the opportunity of a six-figure payday ($425k, in the latest case) plus, generally, continued employment in the corporate-owned franchise may well be very attractive.

Equally, if there is large growth from the insurance and municipal markets why don’t the franchise holders benefit from that? Is it because the USA is already saturated with corporate operated outlets? If not, how is the company able to say to these large customers that they can cover the whole country if they don’t allow their franchisees a piece of that work in the local area? It doesn’t make sense.

The main engine of new growth is insurance work, municipal is more potential than actual at present. I think that all the insurance work is booked centrally and then farmed out to franchisees (corporate and independent) on a fixed fee basis, but this is an area I will try and find more out about.

They would have us believe that they are a technology company rather than a service provider. I don’t buy that at all. The same acoustic etc technology is available to everyone.

I don't really disagree with you here. However, my impression is that, although the technology is available, it is not necessarily widely used by the small companies generally competing for this work. Water Intelligence (LON:WATR) provide full training for their technicians and send them out in uniform, etc., to just generally provide a more skilled and professional service than that available from rivals.

But it is on the too good to be true pile for me.

Fair enough, but it's in my ten-bagger pile. Same company, viewed through different lenses.

Hi Effortless

You make fair points and I take it that the price they paid to buy back that franchise you mention makes sense (not having looked at that myself).

I recall vaguely that late last year you mentioned that you were looking into the corporate governance issues raised by (sorry - don’t remember who). Did you find out anything useful?

Graham,

Yes I did say that, and no, I haven't done it yet. It's still on my 'to do list', however.

Damian Cannon

Strong results from Gamma Communications (LON:GAMA) today with FY earnings beating estimates (30.3p vs 29.6p). Seem to be effectively leveraging their fixed/mobile business to provide additional services to customers. A high quality business with an excellent track record the outlook is positive:

"The Board is positive about the outlook for the business in 2019 and beyond. We have considered the effect of Brexit on the future performance of our business and have identified no material issues which are specific to Gamma. In the event of adverse macro-economic factors, such as a slowdown in the UK economy, Gamma has a business model that delivers a very high percentage of recurring revenues that gives greater certainty over performance in the short to medium term.

As a predominantly channel-focused business, Gamma will continue to concentrate efforts and investment on strengthening our relationship and capabilities to support the channel to be successful. We will also ensure that in the direct business, we continue to focus on growth with larger enterprises and the public sector, and on building on an already strong reputation for operational excellence and service quality."

Small Cap Value Report (Tue 12 March 2019) - HAT, 888, FCCN, STAF, MTC

H & T (LON:HAT)

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...