Small Cap Value Report (Tue 16 July 2019) - BRBY, FUL, MPAC, BAG, XLM

16th Jul by Graham Neary

59 comments 10429 reads

Hi everyone!

Thanks for all the fantastic feedback yesterday on the subject of tablets. I wandered around a couple of department stores for a few hours, and in the end decided to wait another few months before making a bigger purchase that could also be used as a laptop. There are some amazing new hybrid devices (with both laptop and tablet functionality), and I think I'll choose the Surface Go or Surface Pro from Microsoft.

Burberry (LON:BRBY)

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

More portfolio news this morning, with a Q1 update from Burberry (LON:BRBY). This was already my second-largest holding, and the shares are up 8% as I type. The company has reported a return to like-for-like store sales growth (around 4%) thanks to a strong response to the company's new product range.

The outlook for FY 2020 is unchanged, including the previously-announced H2 weighting. But I think that investor uncertainty surrounding the new designer is evaporating. Like-for-like store sales growth, the closure of some underperforming stores, and £120 million of cost savings are all reasons for encouragement. I'm happy to continue holding for the foreseeable future.

Note also that this share has a StockRank of 87. I'm not ashamed to buy quality big-caps, sometimes!

Ok, time to check out some small-caps.

Fulham Shore (LON:FUL) - results
MPAC (LON:MPAC) - trading update
A.G.Barr (LON:BAG) - trading update
XLMedia (LON:XLM) - tender offer

Fulham Shore (LON:FUL)

Share price: 12.4p (+8%)
No. of shares: 571 million
Market cap: £71 million

Final Results

This restaurant has really grown on me. It started out as a research project, but I found that the sourdough pizzas at Franco Manca were so good and the meals were such good value that I was happy to keep going back.

I also tried out The Real Greek in Covent Garden this year - not such a compelling format, but still a good experience.

These are some decent results:

Revenue growth is 17%. The total number of restaurants increased…

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GreyInvestor

16th Jul

Hi Graham, I went through the tablet search and eventually decided to go for a good spec Microsoft Surface Pro. Most importantly, it came with a top spec keyboard too, and a pointer.

I decided that the price was too high new, so I went for a nearly new one on Gumtree, where I could meet and talk to the owner.

Having satisfied myself that all was well, I then bought it. It was a cracking deal. 18 months on, I’ve had zero problems. The Surface had hardly been used.

I still use a four year old iPad, and am doing so now. The Surface is for my financial stuff. So I have both of those plus an Android phone.

xcity

wrt tablets
I have
2 old iPads
1 Google 7"
1 Samsung 10" Note
1 PC convertible (Toshiba)
1 Surface Book
(+Samsung note phone)

The iPads are best for battery life
The Samsung 10" is the most useful for general light/medium use (was the 7" before that). I find the pen makes a big difference to how I use a tablet.
The Surface Book is very good. But like all Windows PCs, Windows update is an affliction.
Also use Office365 & Dropbox, amongst other services.

timarr

Hi ambrosia

Timarr you should start doing your own regular blog, i like the clarity youre able to see in the market, after youve said that it now just seems obvious

Well, that’s very kind, but with hindsight everything is easy. In any case I have a full-time job that I enjoy very much and I’m very happy to leave the hard work to Paul and Graham.

I think with Fevertree Drinks (LON:FEVR) the jury’s out. Research shows that we love growth stocks – and we’re very good at identifying them. Unfortunately, we habitually pluck defeat from the jaws of victory by overpaying for them. Exhibiting the patience to wait for very good companies to hit a pothole, and then having the skill to identify that it is a pothole and not a sinkhole, is a skill in its own right. After 30 years I’m still not very good at it.

But any company with this type of nose bleed valuation has to have an exceptional offer and a defendable moat – the first to keep growth rates up and the second to ensure competition doesn’t erode margins. The slightest misstep on either and the valuation will dive. Too rich for me, but Fevertree Drinks (LON:FEVR) is one of the few companies out there that might end up justifying its price, because the brand may turn out to be insanely valuable if everyone starts asking for Fevertree instead of tonic.

But A.G.Barr (LON:BAG) on a PER of over 30 – nah, that’s just silly, even in normal times.

P.s. I have a big holding in B P Marsh. I’m a fan, but it is very dependent on a few very valuable stakes, is it not?

JohnEustace

Re BP Marsh, that’s to be expected isn’t it? If you back a number of startups then there is likely to be a few big winners and an overall Pareto distribution.
My own portfolio returns would look less pretty if you took out my three biggest winners. But I do have them.

fwyburd

Re Fulham Shore (LON:FUL)
I saw David Page present at a Mello City event last year. He was charming and funny but I was troubled by one thing he said that has kept me away from investing, even at the very low levels the SP has been over the past few months.

I asked him about The Real Greek (RG) that opened in Dulwich a year or so ago which is on a site that has seen many casual dining operators come and go over the past couple of decades including Bella Pasta, Caffe Rouge etc. In short, this site struggles and it seemed to me that the RG was never very busy when I passed it. However opposite it, there is a tremendous site with a restaurant called Rocca which is a firm favourite of the Dulwich population and is permanently full.

He made a throw away remark that some of the directors were investors in Rocca and confirmed that the site was very successful. On looking into it, I found that he is one of the directors of Rocca Ltd which in turn is owned by "The Old Boys Club Ltd" a company on who's board he sits with David Sykes.

Now I appreciate he is allowed to run other businesses but for me there is a conflict of interest when it come to identifying good quality sites and in the case of Dulwich, his private interests are arguably disadvantaging Fulham Shore (LON:FUL) shareholders. Rocca has another site in South Ken - was this site considered for Franco Manca?
So not for me
Cheers
Francis

Gromley

Thanks for flagging that Francis. ( Fulham Shore (LON:FUL) )

I'm obviously having a very fickle day as digging further I have decided to sell out (0.7% gain after costs - I'd settle for being able to achieve that every day).

I hadn't seen your post at the time, which adds just another 'minor' niggle.
I my analysis above I had failed to recognise that the FY19 numbers are for 53 weeks whereas FY18 was 52 - that might seem triviial; but I arrive at the fact that LFLs were probably negative 1%, whereas the management speak directs us towards a view that 17% could in some way be an "underlying" number.

Too much smoke and too many mirrors for me, on reflection (hoho).

Cisk

Graham, just to add my two-penneth to the tablet discussion - personally I prefer Macs and still use a 5 year old 15” MacBook pro - with the old keyboard (much nicer than the new ones) but mostly use an 11” iPad Pro. It does everything I need it to, and the screen ratio works for me e.g. playing movies on planes etc.

One thing worth considering is that apple have finally seen sense and will be giving the iPad line a slightly different OS to that of the iPhone. This should make it far more friendly for business use, better file management etc, ability to use a mouse and so on. This makes perfect sense as the latest iPad pros are so powerful, have great battery life and fantastic screens, albeit they’re very expensive and hampered by their operating system.

ISAallowance

Regarding tablets vs. laptops, IMHO one must reflect on what the primary mode of usage will be (in your case, whilst on holiday).

If creating content, then go for a laptop or top-spec tablet with keyboard and mouse.

If simply consuming content, then any old tablet will do.

All IMHO of course!

That has always been the thing hasn't it :

Tablets for consuming content, laptops for creating it.

I'm in a similar position to Graham here of considering a new purchase. My trusty Toshiba Laptop does everything I want, but is a little on the bulky side; so I'm leaning towards a decent android tab + bluetooth keyboard and mouse. - Possibly the best of both worlds without having to pay OTT for a "crossover"?

Also use a bluetooth keyboard and mouse. Worth spending money on a good one.
I use a Logitech keyboard which can save 3 different settings, so switching between tablets/phone etc is very easy.

davidjhill

Francis - re Fulham Shore (LON:FUL)

yes, I was also aware of this re Rocca. Oddly when I tried the Real Greek in Dulwich one of the waiters told me the same people owned it. On closer inspection it wasn't Fulham Shore (LON:FUL) but same directors, as you found.
I went to Real Greek again on Friday night in Dulwich and it was pretty empty. Maybe just the start of summer lull but didn't feel particularly profitable. As you say Rocca was certainly full.
What is interesting is that Rocca does wood fired pizzas. Not the same as Franca Manca concept but not different enough to merit a FM in the area, though they do have one in East Dulwich. That itself is now under some threat as 500 degrees has opened 2 doors down and is similar in concept. I do wonder whether this happening in one location can be repeated in others over time and cannibalise even profitable sites?

I don't own Fulham Shore (LON:FUL) and am reluctant to do so for all the comments above as well as some of the others, such as yours.

Sounds like you might be local to me David. Does anyone else reside in the SE24 area (or East Brixton) as I like to think of Dulwich? If there are, perhaps we could organise a get together...Anyone?
cheers
Francis

Paul Scott

Re Cloudcall (LON:CALL) (I have a long position) - I've been busy today with family celebrations (birthdays, graduation, etc), hence the late comments here from me.

I quickly looked at the CALL trading update this morning, and thought the RNS read well, and would likely cause the share price to rise. So was a bit perplexed when looking several hours later, and finding it down about 10%.

To save doing all the numbers I too have referred to the update from Cenkos which you can access on Research Tree. They way I see it (and I'm glass half full on this one), is that;

Very good H1 organic revenue growth of +30%, but broker forecast was too high, at +45%. I say too high, because when I recently discussed buying more CALL shares with a sector expert, his view was that the +45% FY 2019 revenue growth target looked too high. So he held back from buying more shares, whilst I forged ahead and increased my position size (at slightly higher than the current price, so not a disaster by any means).

I listened to most of the results webinar, which was useful for more colour on the various points, and some great questions submitted by participants too. Mr Cleaver, as always, very upbeat about the prospects, but apologised for growth being a couple of months slower than expected, due to some CRM integrations & sales leads taking a little longer than expected. I understand why many shareholders will be annoyed by this, as it's pretty much what always happens here, but personally I'm more focused on the strong organic growth, combined with high gross margins & strong recurring revenues. This is a product which is in demand, and (surprisingly) performing better in the USA than the UK. I reckon someone in the US is likely to buy it, potentially at a much higher price than AIM stock market investors give it - there can be a large gulf in valuations, with the USA valuing this type of business much higher than we do.

Cleaver also talked about how CALL is becoming the dominant player in providing unified communication add-ons to recruitment CRM groups. He said that technological change is being driven by the "big 7" global recruitment groups, and that CALL is talking to all of them. If he's right, then it means CALL could own this niche in the not too distant future. I very much like that, and am prepared to be patient.

Cash - the spectre of yet another placing has become more likely after todayy's announcement. Breakeven has been pushed back for the umpteenth time, from late 2019, to mid-to-late 2020. There's no doubt that AIM investors are getting increasingly annoyed with repeated fundraisings, and ever-increasing costs, to drive growth. But what do they want instead? The alternative is to deliberately slow down growth, and defer product development, which would be crazy. The stock market really isn't a good place for small growth companies, in my view. Things always take longer than expected, and cost more than planned, which undermines investor confidence. Perhaps brokers should raise a lot more money when floating companies, including a large contingency reserve?

Personally I don't really care if the company has to do another say £2-3m fundraise, which would dilute by about 10%. I'd much rather they push ahead with growth, and raise money if necessary. The new bank facility is expensive, at c.9% above LIBOR, but on the webinar Cleaver said that the overall cost is roughly the same as the old Barclays facility which had non-utilisation fees. They describe it as venture lending, hence the higher cost than regular lending for profitable companies.

The new broker forecast seems to me, to have overshot too high, to possibly a bit too low. Various things in the pipeline suggest that there could be an H2 weighting, so personally I'm hoping for an acceleration in H2 from 30% to maybe 35-40% in H2. That's for revenue growth.

My Summary;

Bull case

Strong organic growth (+30% is superb, even if it is below forecast)
High gross margins & high recurring revenues
Low customer churn & good up-selling
Takeover potential

Bear case

Missed 2019 forecasts, so today's trading update is a mild profit warning
Prospect of yet another fundraising?
Breakeven repeatedly pushed out

My opinion - each investor will form their own views on this. i understand the frustration of bears on this stock. But for me, the potential upside is sufficiently large, that I don't really mind the bumps in the road - it comes with the territory, and doesn't undermine the upside case very much at all, in my view.

Maybe I take a longer term view than others? If growth had stalled, or even gone negative, then I'd unceremoniously ditch this share as a failure. However, the 30%+ organic growth is genuinely exciting. The product works well (I know, as I've tried it), and good momentum is clearly there, with customer growth. It looks cheap to me.

Wimbledonsprinter

Francis I don't live in London (not Dulwich) but I am in Dulwich quite regularly for family reasons. I have been also several times to the Real Greek of Fulham Shore (LON:FUL) and the Rocca. The Rocca has been open for several years and therefore I don't think the Rocca site would have been available when RG was looking. The Real Greek is usually pretty empty - although the food/ service is quite good - the Rocca I don't go to anymore after I (and relatives) have been served inedible food there. I have not really understood why the Real Greek site has always been a dud whatever the brand (but it has). The evening sun is on the other side of the street where the Rocca is - but then the Pizza Express on the "dark side" and has been very successful.

Velo

17th Jul

So, A.G.Barr (LON:BAG) and Graham @

"Conclusion - Barr is staying on my watchlist, as I wait for a juicy buying opportunity...."

Prices that reflect a juicy opportunity?
With a forward PE ratio tonight of 25.6 and an industry median of P/E 17.1 then the first thing to expect with such a serious profit warning is that Barr's historic premium rated PER is at least reduced to the industry median for starters, which would suggest the first low to consider is approx 416p - just to be plain average. That would be the first key "juicy opportunity" IMO.

But how far is it from the bounce-off 'golden ratio', the 61.8% Fibbo retracement level? Well taking a reading from the depths of the last crash in 2009 to this year's recent high gives the 61.8% ratio as 429p

So, initially 420's to the 400mid-teens, In other words the lower 400p's?

A quick check of Stocko's valuation metrics give a variety of valuations of circa 340 to 430's for four of them before the horror valuations of zero etc.,
--------------------------------

Just to reduce Barr to the ranks of average, suggests low 400's.
A fondness for last chance saloons with the golden ratio Fibbo 61.8% ratio to bounce off, suggests similar but a little higher in the 420's ......Hmm.

Then there's the Stocko valuations mostly in the mid-300's (bar one, above 400).
--------------------------

So, in summary, commence with small tranches of buys in the low 400's initially? Then see if mid 300's are up for grabs for further tranches?

- But wherever the SP is headed it is a profit-warning hit stock, so whatever price looks appealing eventually, none will be truly "safe" to buy until at least a full 12 months has expired.

HI Wimbledons Printer, more great local knowledge, thank you.
But my question is whether the Rocca site could have been a Franco Manca one (not a Real Greek) and if there was a conflict of interest in that decision?
cheers
Francis

alpha2

Whilst I agree with the comments about Rocca and David Page - a bit pleased with himself - he may well own the freehold of one of these, I wouldn't be surprised, I do think that Franco Manca has been built to take advantage of the flaws of the other Pizza chains. Small menu, staff paid good wages and keep tips so better loyalty and retention. No need to discount so not raising menu prices and offering 30% off all the time like Pizza Express and Bella Pasta. Also not burdened with a rump of hugely over-rented stores.
It used to be that rent and rates combined should be no more than 20% of net sales to get a decent return. those days are long gone but may be returning. Also relatively low debt 13% of sales v 42% for RTN.for example. 37% for Domino's.

18th Jul

Linking to my own post above -

Update:
On Tuesday Graham's carefully considered calculation of the new PE ratio for A.G.Barr (LON:BAG) came out at P/E25.5
My midnight back of a fag packet calc last night came out at P/E25.6
And an update from HL suggesting the new PE as P/E26

I thought we were all, more or less, on the same page but look at tonight's close now that Stocko has fully digested the new landscape.

Tonight it's displaying the new PE ratio as P/E18.9 based on 617p closing SP. That's a considerable difference to all three of us (and the Industry median has increased fractionally to P/E17.2)

So, using Stocko's latest PE ratio the current close of 617p on a premium rating to the average of P/E18.9 would have to fall to circa 561p-ish to be just in line with the industry average (If that's the market's intention).

So the first "juicy buying opportunity" I know amend and offer up as a suggestion of 561p-ish.
-----------------

But if the ultimate retrace is to be (IMO) the best/'final' of the Fibbo retracement levels then quite a further drop to 429p, but it has yet to break past the not-really-a-fibbo-number, the 50% ratio of circa 530p's which coincidentally, is within spitting distance of the Industry median P/E for BARR of 561p.

So all-in-all, for anyone stalking BARR could, ultimately, deide that the middle 500p's might be a strong contender for considering a "juicy buying opportunity"?

Worse case scenario? Longer term, maybe 420p's ?

I thought we were all, more or less, on the same page but look at tonight's close now that Stocko has fully digested the new landscape ... Tonight it's displaying the new PE ratio as P/E18.9 based on 617p closing SP. That's a considerable difference to all three of us (and the Industry median has increased fractionally to P/E17.2)

By the power invested in me via the magic of long division ...

... the 2019 EPS (historical) is 32.2. The trading update indicates a 20% fall giving a 2020 EPS (forecast) of 25.8, giving a PER at the current price of about 24 (615/25.8 = 23.8).

As far as I can see the stock report forecast PER of 18.9 reflects the unadjusted forecasts on the new share price (615/32.4 = 18.9). It usually takes a week or so before new forecast data feeds through into stock reports.

Small Cap Value Report (Tue 16 July 2019) - BRBY, FUL, MPAC, BAG, XLM

Burberry (LON:BRBY)

Fulham Shore (LON:FUL)

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Graham Neary

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