Small Cap Value Report (Tue 14 May 2019) - SDRY, GRG, CML, OTB, IDEA, PMP

Wednesday, May 15 2019 by

Good morning, it's Paul here!

Here is a catch-up section, before I look at today's news.

Superdry (LON:SDRY)

Share price: 447p
No. shares: 82.0m
Market cap: £366.5m

Pre-close trading statement

A reader asked me to comment on this most recent trading update from 9 May 2019. It is headed with this comment;

Trading performance continues to be weak; initiatives to stabilise and improve performance underway

This has to be seen in the context of the recent Board upheaval, where the founder came back, and kicked out the under-performing old Board. That struck me as a good thing. However, the voting figures made clear that shareholders did not agree, as there was little support for Dunkerton from outside shareholders. That's important as it could mean an overhang of potential sellers in the share, who don't like the new (returning) management. Hence I'm wary of buying into this share, as that overhang could persist for some time, perhaps?

The 9 May 2019 update covers this period;

Superdry announces a trading update for the 13-week period from 27 January 2019 to 27 April 2019 ('Quarter 4').

It's another profit warning;


That's not really a surprise, as new (returning) management has not had time to do much yet. Plus there's likely to be a desire to blame continued poor performance on the old management, and then do a kitchen-sink job in the figures, which lays the ground for a subsequent improvement in performance. That's what usually happens!

Revenues - are showing a deteriorating trend (i.e. Q4 worse than H2, and both worse than FY);

Group revenue flat year-on-year (0.0%), but declined 4.5% in Quarter 4. 
  Wholesale revenue up 3.6% to £335.0m year-on-year, though declining 9.3% in Quarter 4.  The Quarter 4 decline was driven by increased levels of returns, lower than anticipated in-season orders and decisions not to ship to customers that had reached their credit limits.

The last point, about customers reaching credit limits, concerns me in particular. This suggests that there could be elevated bad debt risk in SDRY's sales ledger. In my sector experience, if deliveries to customers have to be put on hold, due to credit limits being reached (or exceeded), then the customer is clearly in financial trouble. That…

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Superdry PLC, formerly SuperGroup PLC, designs, produces and sells clothing and accessories under the Superdry brand in approximately 670 points of sale across the world, as well as online. The Company offers a range of products for men and women. The Company operates through three segments: Retail, Wholesale and Central costs. The Retail segment's principal activities consist of the operation of the United Kingdom, Republic of Ireland, European and the United States stores, concessions and all Internet sites. The Retail segment is involved in the sale to individual consumers of its brand and third party clothing, footwear and accessories. The Wholesale segment's principal activities consist of the ownership of brands, wholesale distribution of its brand products (clothing, footwear and accessories) across the world and trade sales. It offers a range of products, including t-shirts, polo shirts, hoods and sweats, joggers, tops, dresses, jackets, shirts, footwear, bags and accessories. more »

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Greggs plc is a United Kingdom-based bakery food on-the-go retailer. The Company's products and services consist of a range of fresh bakery goods, sandwiches and drinks in its shop. The Company also provides frozen bakery products to its wholesale customers. The Company owns approximately 1,698 shops, 12 regional bakeries, one distribution center and one manufacturing center. The Company has approximately 105 franchised shops operating in travel and other convenience locations. The Company offers pastries and bakes, sandwiches, breakfast, sweets, pastas, salads and soups, bread, platters, drinks and snacks. The Company's Balanced Choice products offer choices, which have approximately 400 calories. The Company's sales are made to the general public, as well as to certain organizations. more »

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CML Microsystems Plc designs, manufactures and markets a range of semiconductor products for use in communications and data storage industries. The Company offers semiconductor products for professional applications within the storage, wireless and wireline communications market areas. It operates in the United Kingdom, the United States, Germany, Singapore and Taiwan. The Company offers semiconductor products for storage applications, such as Industrial flash memory cards (CompactFlash, secure digital (SD) card, multi-media card); solid state drives (SSDs), embedded storage and special function cards. It offers semiconductor products for wireless applications, such as professional and industrial analogue/digital radios (voice centric); wireless data products (radio modems, pagers, telemetry and marine safety). It offers semiconductor products for wireline telecom applications, such as security alarm panels, point-of-sale, health monitors, meter reading and telephone exchange. more »

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

39 Comments on this Article show/hide all

MrContrarian 14th May 1 of 39

My morning smallcap tweet: Cellcast - sell fast.

Duke Royalty (LON:DUKE), Cellcast (LON:CLTV), Conygar Investment Co (LON:CIC), Hardide (LON:HDD), Portmeirion (LON:PMP), Microsaic Systems (LON:MSYS)

Duke Royalty (DUKE) defers 2 loans, swaps another for more royalties. Boosts rev by at least £3.7m over 5 years.
Cellcast (CLTV) FY18 poor as foreseen in Nov trading stmt. Poor trading has continued plus higer taxes in Kenya saw reduced fees for our technical and consultancy services to overseas gaming and lottery operators. More cost cuts. "There has therefore been increased focus by the Directors on the long-term viability of the economic model that the group utilises which has prompted the Directors to undertake a review as to the prospects for the group going forward. The Board is currently exploring all options available to the group." What a clunker.
Conygar Investment Co (CIC) H1 big loss due to 100% (£18.5m) write down of Haverfordwest land value due to weak demand there. NAV NAVsh 179p down 22.3p despite buying back 5.4% of shares. How can the land be worth zero? Will help future profit of course. I'm not a fan of the CEO Robert Ware.
Hardide (HDD) H1 rev up 9%, pretax loss doubled to £650k. Guides RY rev at the lower end of market expectations. Blames some short-term disruption with one customer and the unpredictability of larger customer projects.
Portmeirion Group (PMP) A rare warning from this quality outfit. Weak Korean sales means FY pretax will be significantly below market expectations. Will maintain expected divs.
Microsaic Systems (MSYS) Bullish. Orders (not rev) YTD (4.5 months) significantly above whole of prev H1.

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Webpax 14th May 2 of 39

Many thanks Paul for coming back to cover Superdry (LON:SDRY). Someone asks a question about the debtor book in the trading update Q&A (24.00 mins in

I'm not sure I really understand the response but it seems to suggest the amounts involved are relatively small (less than £5m).

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matylda 14th May 3 of 39

Morning Paul,

Agreed, great update from Greggs (LON:GRG) - I really do hope they are not a CAKE disguised as a Sausage Roll...

"Look at the LFL increase, which is extraordinary, given falling High Street footfall;"

Much appreciating the early commentary.

Blog: Briefed Up
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john652 14th May 4 of 39

Portmeirion (LON:PMP) down 18%, I’d conceded this a fair entry point for a quality stock, and probably a bump in the road, but why have sales in Korea fallen off a cliff, and this looks like a cliff reading between the lines. They are selling well, have a large product offering, and suddenly sales way down, why? This is not consistent with other markets, caterers are not hungry for the ‘latest ‘ newly designed plate?? Odd, I think not the right entry point.

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Paul Scott 14th May 5 of 39

In reply to post #476021

Hi Webpax,

That's great, thanks for the audio link to Superdry (LON:SDRY) analyst meeting.

They said that the amount of revenue lost due to putting customer accounts on stop, was £5m. However, they don't disclose what the potential bad debts would be, nor whether bad debts are insured or not (although that might be covered elsewhere in the audio? I only listened to the bit at 24 minutes in that you flagged).

I'll listen to the full audio when time permits. Thanks very much for posting that link, which is really helpful :-)

Best wishes, Paul.

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Paul Scott 14th May 6 of 39

In reply to post #476041

Hi john652,

I didn't spot the profit warning from Portmeirion (LON:PMP) in my early trawl of the RNS.

That's next on my agenda!

Regards, Paul.

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Bouvier 14th May 7 of 39

I am rather perplexed by the profit warning at Portmeirion (LON:PMP) issued today with sales during the first 4 months of 2019 down 10%.
Have the management lost the plot?

The annual results issues on 21 March 2019 they stated:
"Although we face political and economic uncertainties around the world, including Brexit, we look forward into 2019 with confidence and at this very early stage of the year expect trading to be in line with expectations for the full year."

Today's trading statement says that sales in UK are up 5% and in the USA up 8% and these markets represented.
From the annual results the market split is:
UK 35%
USA 30%
Korea 9%
RoW 26%

Whilst that split might not have been exact for the first 4 months of 2018 it should be indicative. So the increase in sales for UK and USA would represent a 4% increase in overall sales. But if overall sales are down 10% then sales from Korea and the rest of the world must be down 14% as a proportion of total sales. Could that mean nearly no sales in Korea? And why was this not known on 21 March?

The only bright spot is that the AGM statement issued this time last year for the first 4 months of 2018 showed sales up 15% and up 20% on a constant currency basis so the comparative was demanding.

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jonno 14th May 8 of 39

Sold Portmeirion (LON:PMP) on the profit warning, which is a shame because I think it is a sound company. But the stock market is unforgiving and having read the Anatomy of a Profit Warning it seemed the sensible call. Will look to buy back when the dust has settled and have a clearer picture on the numbers.

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tomps3 14th May 9 of 39

Not related to today's news, but I know there's interest in Ramsdens Holdings (LON:RFX).

Here's an interview piworld have just published, with Peter Keynon, CEO, Ramsdens Holdings (LON:RFX) interviewed by James Lynch, Fund Manger of Downing Strategic Micro-Cap Trust.

Peter discusses the business areas, which makes the company very defensive. Their strategy for growth, both short term and long term. The cash generation, dividends and capital allocation. James summarises why Downing think it's an interesting company.

It's shot at the Middlesbrough branch, so you get a feel of a Ramsdens branch.

Enjoy!  (It's about 20 mins.)

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Webpax 14th May 10 of 39

In reply to post #476046

Hi Paul, you're quite right. I've listened to the whole audio and I don't believe any other mention is made of bad debts. Dunkerton comes across as very bullish and confident he can turn things around (but then I suppose he would be!). It's certainly worth a listen to the whole recording.

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Housemartin2 14th May 11 of 39

In reply to post #476041

.Post Brexit actually happening, Portmeirion (LON:PMP) falls out of the EU/Korea trade agreement. Duties then become 10%. Forward planning by distributors ?

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Glorenfeld 14th May 12 of 39

In reply to post #476086

Portmeirion (LON:PMP)

I echo what others have said about this profit warning - it's far too light on detail and raises so many questions. It really does seem that there were practically no sales in KR and that RoW must also have continued its decline.

Re the point on Brexit, I'm not sure this follows, as FY18 saw an increase in KR rev of ~25% and the Brexit issue was notionally more pressing during that period.

The increase in FY18 was chalked up to new product development. Given that they say new product development is the thing that's going to turn around this quarter's dire performance, I'm really not sure what to make of any of it. Do pottery products have an absolute max 1 year shelf life in KR?

Perhaps interesting to note that the KR economy did contract last quarter, following growth in the preceding four quarters.

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Camtab 14th May 13 of 39

Paul, I see this morning Beeks BKS are increasing their number of data locations using Equinix. I am not an expert in the sector but it seems to me reading between the lines this probably suggests things are going well. I note they are at Mello so will be interesting to chat to them.

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Camtab 14th May 14 of 39

Oops also I see Zytronic results are out. Pretty much in line with the expectations they had set in their recent trading update. Maintaining divi but cautious outlook statement. Can't help feeling another buy in opportunity. Cash generative, good balance sheet and honest management.

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kevfle 14th May 15 of 39

I'm really disappointed in Portmeirion this morning which I had always thought was a company which communicated well with its shareholders. I agree with the other comments this morning however that this trading update is not sufficiently clear. In the absence of more specific information, you have to assume that its export market (except for the USA) has totally fallen apart, but why I don't know.

If in doubt my policy is to sell and so I have sold my entire holding this morning.

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timarr 14th May 16 of 39

In reply to post #476066

But if overall sales are down 10% then sales from Korea and the rest of the world must be down 14% as a proportion of total sales.

Perhaps more significantly it means that SK and RoW sales have dropped by an eye-watering 40%. It's hard to believe that these markets have simply decided, en-masse, that they don't like the current product ranges.

The price drop looks overdone, but given the lack of detail it isn't surprising.


EDIT: looking at some of the other comments I do wonder if Brexit was an issue - if distributors brought forward shipments in order to avoid tariff issues in the event of no-deal that might explain the big disparity, especially if those markets were slowing at the same time. It would artificially boost last years sales and artificially reduce this years. If that was the case, though, you'd expect the company to point it out. All in all, a bit puzzling.

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hawkipa 14th May 17 of 39

In reply to post #476066

I too am struggling with the profit warning from Portmeirion (LON:PMP)

They specifically mention Korea, but the statement clearly implies all export markets have suffered. So why not detail them too? Extrapolating UK/US sales growth for the FY might suggest a potentially very bad collapse in sales to export markets generally, if the statement is to be believed, that the full year effect on group sales will be less than -10%.

The annual results statement possibly looks disingenuous at best in light of this announcement.

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barney100 14th May 18 of 39

I seem a bit more impressed than Mr Market is with todays announcement from Duke Royalty (LON:DUKE)

Tidying up the portfolio & sweating at least £3.7 million over 5 years from existing assets is all good as far as I am concerned. Also liked the sound of "We are also looking at the opportunity to deploy further capital at accretive returns via follow-on investments into the acquired royalty partners and look forward to updating the market in due course."

I really like the business model here and remain a happy holder.

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Housemartin2 14th May 19 of 39

In reply to post #476156

Ah well I read the Duke Royalty (LON:DUKE) announcement as deferring larger cash sums sooner in return for more cash later.This increases the risk and could reduce the valuation of the company. Currently Mr Market seems to agree. Personally I like the idea but it depends upon the relative numbers, I imagine.

One thing about Duke Royalty (LON:DUKE) that I am concerned about is the increasing financing to existing partners rather than new ones to spread the risk. Here they flag a continuation of that policy.

I am also not wholly convinced about the implied quality of the partners, though I have nothing to go on here just a feeling.

Still a holder.

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Zipmanpeter 14th May 20 of 39

PMP profit warning after only 4M of 2019 crashes price by 25% to 905p – blames it on Korea/ROW but these markets together are only 20% Sales so as other posters say, this must be catastrophic.

My guess thererfore is very significant Distributor relationship issues. PMP has been having issues in Korea for some time; if the new products did not go down well perhaps one side or the other has called it quits. Or maybe there has been a key leaver in the Export group. People-related issues can torpedo (or supercharge !) Export market sales. I used to worked selling FMCG in multiple markets via Distributors in SE Asia and Africa and access to the consumer and thus sales can be stopped overnight by a disgruntled phone call or a loss of trust.

In a country like Korea, fixing or replacing a long established Distributor could take 12 months but can always be done (if the product is still wanted). If this is what it is, I therefore see this a a relatively short term and fixable problem but agree the warning is a bit opaque to be sure (although HR related stuff whilst vital is rarely shared in RNS updates, especially if it does not directly affect the C-suite.

Long term recovery potential looks plausible based on the 5 year plan that calls out 5 key areas:
i) Grow online – only 4.1% of sales in 2018 but selling collectible/giftable pottery/home fragrance units - I would have thought ideal for direct online marketing!
ii) Selling Home Fragrances globally – UK was 83% of its £15Mn sales
iii) Double Spode brand – exploit 250yr Heritage but with more contemporary products
iv) Grow margin from 10.7% to 13% – online, export, use excess capacity in place, automations
v) M&A – new sales markets & similar products; good mgt record in M&A eg Wax Lyrical

Of these plans, only Spode looks particularly challenging to me although perhaps the underlying demand for collectible (British) pottery is a long term risk in a modern, digital world

5 year plan if achieved would effectively double sales to +/-£190Mn by 2022 and increase operating margins from 10.7% to 13%. In turn, this would roughly raise Op Profit from £10 to £25Mn on a business with next to no debt and net cash with twice-covered divi worth 4% yield if held at +/-37p as mgt promise.

I had sold out when the price went North of 1100p, and I may have to wait 2-3 years but I think this is a re-buy opportunity (like Character (LON:CCT) was when access to the consumer was disrupted when Toys-r-Us went under). It may trade lower short term but I am confident it should recover in the end.

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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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