Small Cap Value Report (Tue 14 August 2018) - CGS, MUBL, HAT, MMH, FCCN, D4T4

Tuesday, Aug 14 2018 by

Good morning!

Today we have interim results from H & T (LON:HAT), so that's top of my agenda seeing as it remains one of the larger positions in my portfolio.

On the list today we have:

Castings (LON:CGS)

  • Share price: 402.5p (-5%)
  • No. of shares: 44 million
  • Market cap: £175 million

AGM Statement

This heavy industrial stock reports continuing strong demand from its main customers, but the machining part of the business needs more time to recover to profitability. It's going to move into the company's main headquarters, rather than having is own location. Shares are down 5%.

My view -I'm worried that machining is never going to fully recover from the loss of a big contract in 2017. Return on capital for the group as a whole has deteriorated and may only be restored through some shrinkage as part of the restructuring process.

All of that having been said, the company remains profitable and financially sound. The foundry business is still doing well. This could be worth a look.



  • Share price: 3.75p (-17%)
  • No. of shares: 17 million
  • Market cap: 650k

AIM Notice and Update on Proposed Cancellation

Thanks to MrC for pointing this one out. I would probably have missed it, as the RNS was published after 6pm yesterday evening. MBL is being fined £125k (reduced to £75k for early settlement) for breaches of the AIM rules by previous members of the Board.

MBL is now a cash shell after its last operating subsidiary appointed administrators (from Begbies Traynor (LON:BEG) ) in June. It proposes to delist and then, as a private company, return cash to shareholders via an orderly winding up.

I dabbled in these shares about five years ago, when I was doing the "deep value"…

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All my own views. I am not regulated by the FSA. No advice.

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Castings P.L.C. is an iron casting and machining company. The Company caters to both domestic and export markets. Its segments include Foundry operations and Machining. The Company has over three trading operations, including Castings (Brownhills), William Lee Limited and CNC Speedwell Limited. Castings (Brownhills) supplies spheroidal graphite (SG) iron castings to a range of manufacturing industries from its mechanized foundries. William Lee Limited supplies SG iron castings from its foundries in Dronfield, Derbyshire. CNC Speedwell Limited is a machining operation primarily focused on the prismatic machining of iron and aluminum castings from its sites in Brownhills and Fradley. It produces ductile iron castings, SG iron castings, austempered ductile iron (ADI) castings, Simo castings and nickel (Ni)-resist castings up to approximately 40 kilograms in weight using over four Disamatic molding machines and approximately three horizontal Green Sand molding machines. more »

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MBL Group plc is a distributor and wholesaler of home entertainment products. The Company is structured and managed across two segments: Home Entertainment and Other. The Home Entertainment division is a wholesaler of home entertainment products in the export market. The Company has operations in the United Kingdom, Asia, Europe and Rest of the World. The Company also operates Windsong division, which provides a range of compact disks (CD) and digital video disks (DVD) products to export and Internet customers. Windsong is based in South London. The Company's subsidiaries include Air Music and Media Copyright Limited and Windsong International Limited. more »

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H&T Group plc is a non-trading holding company. The Company provides a range of simple and accessible financial products tailored for a customer base, which has limited access to, or is excluded from, the traditional banking and finance sector. Its segments include Pawnbroking, which is engaged in providing secured loans against collateral (the pledge); Gold Purchasing, which is involved in buying Jewelry directly from customers through its stores; Retail, which is involved in retail sales of gold and jewelry, and the retail sales are forfeited items from the pawnbroking pledge book or refurbished items from its gold purchasing operations; Pawnbroking Scrap, which comprises various other proceeds from gold scrap sales other than those reported within Gold Purchasing; Personal Loans, which comprises income from its unsecured lending activities, and Other Services, which comprises third party check encashment, buyback, prepaid debit card product and foreign exchange currency services. more »

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

34 Comments on this Article show/hide all

andyfwwrench 14th Aug '18 15 of 34

MBL (LON:MUBL) - is a situation I would normally be very interested in, but this one looks far too risky. From what I can tell from the RNS the plan does not seem to be to vote on self liquidation at the same time as the delisting vote. The circular, once published, might contradict that assertion so I'm not presenting it as fact. Not to vote on voluntary liquidation whilst the company is public leads to a possibility for such a proposal never being presented to members at all, even ignoring the risk of a vote not passing.

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hawkipa 14th Aug '18 16 of 34

In reply to post #390669

Hi Graham, Re Ramsdens Holdings (LON:RFX). I think that guy from Investors Chronicle tipped it today.

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bobo 14th Aug '18 17 of 34

CGS grew its machining business with just one customer who walked away, it made the mistake of needing to be customer focused when it is process focused and a good cost controller. Basic divergence of direction between a very conservative board and an entrepreneurial outwards facing add on business. Was never going to do well.

On this occasion the ultra-conservatives on the board have won out. Pity as the business strategically cannot grow into SG castings anymore (it is the European centre for this technology) it doesn't want to get into say steel castings (which is could do by buying a few companies) so back to dull stuff. In fact it is so conservative it could be German. One to buy on the dips and just take divis

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Paul Scott 14th Aug '18 18 of 34


A brief comment from  me on the situation re French Connection (LON:FCCN) and its exposure to House of Fraser. This has been a known issue for some time, for people who understand the business.

FCCN has concessions (a store within a store) in department stores, including House of Fraser. These are typically small operations, with minimal staff and little stock. The way concessions work is that all sales are "banked" through House of Fraser's EPoS system. HoF then sits on the money for, I am told, about 2.5 months.

As HoF has been on the brink of going bust for some time, it was worth working out the potential liability to FCCN. Thankfully, a retail FD friend of mine worked out the figures some time ago. He reckoned there was a potential bad debt to FCCN of about £2m (probably less), if/when HoF went bust.

Since HoF went into Administration, then that crystallises the loss for FCCN and other concessions. Mike Ashley would not be paying those debts as part of his acquisition, as pre-Administration trade payables are unsecured creditors, hence usually are paid nothing in this type of insolvency.

How is the £2m estimated bad debt for FCCN worked out?

Estimated 40 concession sites within HoF stores.

Estimated annual turnover per concession of £200k

Giving £8m estimated annual revenues for FCCN from its HoF concessions.

Assume the bad debt is perhaps 3 months takings, arriving at an estimate of £2m bad debt for FCCN.

That's not material, since FCCN has a market cap about £46m, and has substantial net cash - so it can afford to write off a £2m bad debt without any consequences.

FCCN will also have to write-off fixtures & fittings related to its HoF concessions, or at least the ones that are to be closed. This again will not be material, and is non-cash, so not a problem.

The inventories within HoF stores remain FCCN's property, and if necessary can be moved to other FCCN sites, so there should not be any write-offs relating to inventories.

Going forwards, this might prove a nice opportunity for FCCN to accelerate the reduction of its heavily loss-making retail division. So I feel that, once the dust has settled, the market might actually see this as a positive.

To reiterate, the sooner the FCCN retail stores are closed, the better, as they lose money hand over fist! The value in the business is the profitable wholesale & brand licensing divisions. It amazes me that this is so obvious, yet "the market" seems oblivious to it.

There was a takeover approach last year, which must have been serious, since the board apparently spent several months assessing it & allowed the potential acquirer to do due diligence. It's only a matter of time before the business is sold, because the founder/chairman is into his 70's now, and must be looking for an eventual exit (otherwise he wouldn't have engaged with the potential acquirer last year).

I've worked out that FCCN has several stores which are literally black holes for cash, in terms of losses. The leases on these should soon expire. That means that profitability should make a step change upwards. That's what's interesting about this cash-rich company. The brand is still very valuable, and I'm hoping for an eventual payout here of 100-200p, on a trade sale.

This special situation is certainly one for patient investors only! I'll be insufferable when the payday does finally come, lol!

The recent share price softness, presumably on worries over HoF, looks overdone to me, so if it goes much lower, I'll be topping up. But it's already one of my biggest long positions, so maybe it's not wise to tie up too much cash in this one?

Regards, Paul.

EDIT - I imagine there is likely to be an RNS from FCCN very soon, detailing the cash losses due to HoF insolvency. It should also give us some detail on the non-cash write-offs (e.g. F&F), plus an update on what's happening going forwards. I imagine this is likely to say that some HoF concessions will continue, but some will be closed. They'll obviously only keep the profitable ones, and this is a nice opportunity for FCCN to re-negotiate terms with Mike Ashley, on a take it or leave it basis (giving him a taste of his own medicine!). Therefore FCCN should emerge with a more profitable concessions operation after this process has been completed. Hence I'm rather looking at this as glass half full, rather than glass half empty.

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JohnEustace 14th Aug '18 19 of 34

In reply to post #390709

Hi Paul,
Good to hear from you again. A couple of questions occur to me:
Does FCCN have similar exposure to Debenhams? What's your view if any on the speculation about a "House of Debenhams" merger?
And IF reports are to be believed, Philip Day offered more for HoF than Mike Ashley without insisting on putting it through administration. How could that offer not have been accepted?

Edit: If I was running FCCN I would only re-commit to run concessions in HoF if the money owing pre-administration was made good. Hardball time as you say.

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Graham Neary 14th Aug '18 20 of 34

In reply to post #390714

I could easily be wrong but I think Philip Day's proposal involved more store closures and job losses in the short-term than Mike Ashley's.

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Graham Neary 14th Aug '18 21 of 34

In reply to post #390589

Hi paraic, yes I would like to write some macro commentary - stay tuned. I'll do it when I get the chance! Best wishes. G

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Graham Neary 14th Aug '18 22 of 34

In reply to post #390684

Hi Andy, re: MBL (LON:MUBL) I can only agree! Horrible outcome for minority shareholders. G

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hayashi22 14th Aug '18 23 of 34

There appear to be divergent views on Debenhams at present. Another profits warning on the way and back towards 10p OR part of the great new High St game which is being played out?!

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Paul Scott 14th Aug '18 24 of 34

In reply to post #390714

Hi John,

Does FCCN have similar exposure to Debenhams?

Good question. I looked up the store locator page on FCCN's website, and it helpfully set out which stores are within a House of Fraser, by noting "HOF" next to the store location. It turns out that there are 40 FCCN concessions within HoF stores. So my friend's estimate was exact.

I can't see any reference to any concessions within Debenhams. So perhaps (hopefully) Debenhams might just be a wholesale customer of FCCN? If that is the case, then I hope FCCN is insisting on securing trade credit insurance, to protect against any possible bad debt from Debenhams too.

What's your view if any on the speculation about a "House of Debenhams" merger?

It makes a lot of sense, but only if Ashley can buy Debenhams out of Adminstration, in the same way he has done with HoF. Otherwise it would make no sense at all, for Ashley to take on Debenhams' awful lease liabilities, which are around 18 years remaining on their leases, I seem to recall.

I cannot imagine that anyone else would want to take over Debenhams as it stands, for the same reason. This realisation is why I recently sold my (very briefly held, and small) long position in DEB - because I cannot see a solvent way out of things for the company, longer term. It could survive for some time to come, especially if it sells its Danish business, Magasin du Nord, which is up for sale now.

The only way I can see Debenhams surviving longer term, is if it goes through some kind of restructuring to shed its increasingly onerous lease commitments - so a CVA, or a pre-pack Admin. The catalyst could be withdrawal of trade credit insurance, which seems to be hanging by a thread already.

EDIT: so the risk is that the existing equity in Debenhams could well turn out to be worth nothing, or very little, in a restructuring. That's why I've decided that, for me, the shares are now too risky.

And IF reports are to be believed, Philip Day offered more for HoF than Mike Ashley without insisting on putting it through administration. How could that offer not have been accepted?

No idea, you'd have to ask the Administrator. It was a pre-pack deal. There must be some reason why the Administrator went with Ashley as opposed to Day. Administrators are not always interested in maximising the proceeds, they often just want the quickest possible deal, and to not expose themselves to any potential liabilities. Every case is unique though.

Regards, Paul.

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JohnEustace 14th Aug '18 25 of 34

In reply to post #390744

Thanks Paul - I'm a bit surprised but looking further it seems Debenhams don't stock any French Connection items. At least I don't see them on the Debenhams brand directory.

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clarea 14th Aug '18 26 of 34

In reply to post #390709

Hi Paul,

Just wondered if you have any idea if the cash is in the bank yet re the sale of Toast earlier in the year.


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Trident 14th Aug '18 27 of 34

In reply to post #390714

I think principle an administrator cannot favour one debtor over another. Otherwise it could be a bit dodgy for the administrator legally. But no doubt there are many ways to skin that particular cat!

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Twerkdouglas 14th Aug '18 28 of 34

Is STAR every going to be covered? Very large link with a major European company being announced end of this month!

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sharmvr 14th Aug '18 29 of 34

In reply to post #390759

They do like to make sure they get paid :)
Apologies in advance for the flippant comment - you are of course right (in principle!)

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sharmvr 14th Aug '18 30 of 34

Graham - great report - thanks for covering Marshall Motor Holdings (LON:MMH)
Really appreciate the value perspective you give on all companies even when value might not be the primary consideration.

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smatthews1 15th Aug '18 31 of 34

In reply to post #390709

Hi Paul, thanks for your efforts on French Connection (LON:FCCN) a very valuable understanding from one of the complexity's within the retail sector.

I couldn't help but notice this comment...

"...because the founder/chairman is into his 70's now, and must be looking for an eventual exit..."

What does this say about J.Murry the chairman of Andrews Sykes (LON:ASY) who is pushing on 100?  Would this be a candidate for a bid in the future, or would it just be tightly held within the family and passed down another generation?

Its a very sound company overall so its not a high risk stock for me by any means, the biggest problem is getting a good price on the shares as its very illiquid and the current spread is huge at 580 - 630.

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Zipmanpeter 15th Aug '18 32 of 34

Re FCCN , it does look as if Stephen Marks is at least open to a sale of French Connection (given serious due diligence last year, sale of Toast) but I think his ego will require the business to be restored to profit first. Rationally, the business should already have been re-sold/restructured otherwise

So we have a schedule that says - next 6 months kitchen sink all bad news outstanding (store closure costs, concession write offs etc), next 6 months show a clear profit, next 6-12 months find a buyer.

Thus, whilst opportunity is there we are still likely at least 1.5 to 2 years off an end game (unless something exceptional occurs (eg crazy offer, Marks heart attack).

Furthermore, what will fill the gap in his life if French Connection goes - currently it is a hobby that generates $500K pa plus salary other lifestyle benefits. Could go on a few years yet.

.......But you need to be innit, to win it.

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ithomson1 17th Aug '18 33 of 34

In reply to post #390709

The bad debt that French Connection has is probably going to be £2m at the very least and I'd be stunned to find out if it was anything less, it's extremely unlikely that House of Fraser were sitting on 2.5 months of creditors when they were on the brink of administration. The FD would have done everything possible to prevent any cash whatsoever leaving the bank account over the last few months. Cash for staff wages would have become a priority.

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sharmvr 17th Aug '18 34 of 34

In reply to post #391624

Extract from BBC website re HoF creditors - think the exposure to FCCN might be less than stated above as presumably it would have special mention.
Mulberry (LON:MUL) holders might be interested - no position - but the exposure is 60% of anticipated profit and more than 1% of revenue for a business with a sub 5% operating margin. Although I expect at least some of this was already provisioned / insured.
Good luck all

This morning, administrators EY published a huge long list of all the hundreds of suppliers that are still owed money by House of Fraser since it collapsed.

Total liabilities stand at £753.6m, while unsecured non-preferential claims will be about £484m.

Here is a list of some of the largest creditors:
• British luxury fashion company Mulberry is owed £2,411,570.17
• UK fashion retailer All Saints is owed £1,776,969.87
• Italian luxury fashion house Giorgio Armani is owed £1,590,849.62
• British women's clothing retailer Karen Millen is owed £957,320.10
• UK luxury clothing retailer Jigsaw is owed £440,471.25

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About Graham Neary

Graham Neary

Full-time investor and independent analyst. Prior to this, I spent seven years in the financial markets as an analyst and institutional fund manager. I'm CFA-qualified, also holding the Investment Management Certificate and the STA Diploma in Technical Analysis.Away from finance, my main interests are recreational poker and everything to do with China, especially Mandarin Chinese. more »


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