Small Cap Value Report (Tue 19 Feb 2019) - GRG, DUKE, MANO, DOTD, 888, BLTG

Tuesday, Feb 19 2019 by

Good morning!

A mixed bag of companies reporting today. This list is final:

Greggs (LON:GRG)

  • Share price: £17.16 (+7%)
  • No. of shares: 101 million
  • Market cap: £1,734 million

Trading Update

Amazing share price returns at Greggs and the chart has now broken out to new all-time highs.

It reports an exceptionally strong start to 2019:

  • like-for-like sales up almost 10% for the seven weeks to mid-February, total sales up 14%.
  • vegan sausage roll has proven to be a hit and boosted publicity.
  • versus weaker growth in H1 last year (caused by poor weather), H1 this year will be much better.
  • full-year result is likely to be ahead of expectations.

My view - this company proves that it is possible to do well on the High Street. You have to get your brand/market positioning just right.

The StockRanks like it, but I'd note that the Value Rank is prety low. The P/E ratio is pushing 22x:


That same sort of earnings multiple will get you a stake in Mcdonald's ($MCD). For the same price, surely the golden arches would be a safer bet long-term?

Duke Royalty (LON:DUKE)

  • Share price: 41.5p (+1%)
  • No. of shares: 200 million
  • Market cap: £83 million

New Royalty Finance Agreement

(Please note that at the time of publication, I have a long position in DUKE.)

Apologies to those of you who were looking forward to my interview with the company - it was delayed, but was rescheduled for next week. There'll be lots to talk about now!

Duke announces a new £10 million deal with "the largest privately-owned recreational vehicle parts wholesale company in the UK". 

Its website meta-description describes it as "wholesale distributors to the caravan, motorhome, boat and leisure industry." There are over 7,000 products in its online catalogue, with today's announcement saying that it provides over 15,000 parts and has "very low customer concentration risk". It generated sales of £23 million in 2018.

Key points:

  • The…

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

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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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Duke Royalty Limited is a Guernsey-based diversified royalty investment company. The Company specializes in diversified royalty financing and provides alternative capital solutions to a diversified range of businesses in Europe and abroad. The Company’s investment policy is to invest in, without limitation and restrictions (including geographical restrictions), long-term, revenue-based royalties in private and/or public companies, and or other alternative asset classes and/or financing instruments from time to time that bear similar risk and return characteristics. The Company provides financing solutions to private companies that are in need of capital but whose owners wish to maintain equity control of their business. It provides capital to companies in exchange for rights to a small percentage of future revenues. more »

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

44 Comments on this Article show/hide all

clarea 19th Feb 25 of 44

In reply to post #449803

Thanks Graham,

Personally I find some of the best value with small cap daily is when you and Paul dive into the stocks that have a chequered history and come up with reg flag pointers to take away from the story moving forward.

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Graham Neary 19th Feb 26 of 44

In reply to post #449858

Sorry Ben, I won't be able to get around to Spectris (LON:SXS) today. G

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rmillaree 19th Feb 27 of 44

In reply to post #449958


Greggs (LON:GRG)

I have sold too soon multiple times with Greggs - Cest la vie. Only a few months back it went from 1000p to 1400p in no time i thought that would probably be me wack based on what other shares were doing at the time and now we are at 1700 - if only i had known the vegan sausage roll was on its way a few of week later - sigh.

I guess Mr Market thinks certain business staple types are immune from recession and brexit issues - eg greggs and Wetherspoons - 1700 does look a bit toppy though i must admit.

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Richard Goodwin 19th Feb 28 of 44

In reply to post #449968

Realm Therapeutics (LON:RLM) are giving up their UK quote so will only be suitable if you wish to hold shares in a US only company. I expect this to be a significant drag. In addition it is v small.

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hawkipa 19th Feb 29 of 44

Hi Graham,

Re Duke Royalty (LON:DUKE)

Sorry can't resist (great childhood memories):

On a serious note, does taking equity stakes in investee companies not represent a substantial change in approach and a deviation from their business model that should set alarm bells ringing?  Of the latest investment, that means they are now invested in both quasi debt and equity.  Isn't their experience in managing royalty streams that they use debt like pricing knowledge to judge?  Where is their equity experience to justify this change of tack?


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barney100 19th Feb 30 of 44

Exactly what I was alluding to above hawkipa.

It would be interesting to know if the deal was originated by Capital Step and was "in flight" at time of the acquisition or if it was originated by Duke Royalty (LON:DUKE) themselves.

To my mind it looks like a Duke style target but with a CS type structured deal.

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Graham Neary 19th Feb 31 of 44

In reply to post #450013

Hi Paul, yes as I say in the report, I am a bit concerned that they might be moving too far up the risk spectrum for me and potentially away from their mandate. It's not what I envisaged them doing. G

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paraic84 19th Feb 32 of 44

dotDigital (LON:DOTD) I hold and I was surprised to see the share price go up so much this morning as I couldn't see much that hasn't been trailed already. I can't complain though!

Other things I like:
- What could drive the share price here is the potential for huge US growth which seems to be going well so far and today's update reaffirms that.
- I think this whole space is set for some mergers and consolidation which I think we'll see over the next few years. dotDigital (LON:DOTD) is well placed for this as it is one of the bigger firms and has a good cash pile.
- dotDigital (LON:DOTD) focuses on R&D which is important as there is always a risk that digital products become obsolete or out-of-fashion
- We use Dotmailer at work (now renamed to the hideous sounding 'Engagement Cloud Platform') and we really like it. It's easy to use and customisable. It's seen as the best product available by my marketing colleagues. A lot of other platforms like Mailchimp are just a bit too cheap and cheerful for a business to use.

I've sometimes wondered whether Cloudcall (LON:CALL) could be bought out by dotDigital (LON:DOTD) (or even £IMO)

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Matissian 19th Feb 33 of 44

In reply to post #449968

Re Realm Therapeutics. I think the amount of the sales of the assets and cash in bank are in usd, not pounds as you have written. There is probably some debt/liabilities to be paid from the gross cash amount. It is proposing giving up its AIM listing. These are some of the reasons maybe.

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sher3141 19th Feb 34 of 44

A bit of a sticky wicket when a lender lends to a part owned business, usual conflict of interest concerns etc. more than that though you bring in mark to market volatility in trying to value these equity stakes. It will likely increase the volatility of the NAV but also the flakiness of it, with the market applying its own discount to what are just guesses in terms of the value of the equity stakes. I'd be deeply unhappy with them going into equity, surely a pure play 'royalty' (even though these aren't real royalty agreements) would be much more attractive and easy to understand and invest in. The runway is surely big enough to not have to bother going down equity route.

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Howard Adams 19th Feb 35 of 44

In reply to post #449713


Wow adding to my post (#4) this morning Future (LON:FUTR) up over +21% at time of typing.

I hold (topped up this morning).

I haven't had that happen to one of my holdings in a quite some time.


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Funderstruck 19th Feb 36 of 44

Graham; Would still like to hear your take on FFX , with your financials hat on; if you have a spare moment.

And thanks for your continued reports.

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davetparkes 19th Feb 37 of 44

In reply to post #449998

re greggs  .. i thought 1500 was a bit toppy and sold!!

a great business with more to come i think ..

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jwebster 19th Feb 38 of 44

Yes, I own 888 Holdings (LON:888) Big cash pile and high dividend, Share price 171p down from peak this year of 324p in May.

Share price has been re-rated down as their European markets have been hit by local regulatory efforts to reign in gambling. This is a process which may continue and act as a drag on income.

The big news is the opening up of the US due to recent regulatory changes there which opens a window for on-line betting. I'm not close enough to the regs but I think it's state specific as well as federal. 888 are on top of this, recently buying out their US partner in their joint venture.

So, the bull case here is the US venture gets traction and given the US has huge potential, earnings take off. The bear case is the US regulators kill it off, while the European regulators grind down on revenues as well.

Given the share price has de-rated significantly and seems to have bottomed out, I've bought a few here to see how this plays out.

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Beginner 19th Feb 39 of 44

In reply to post #450053

Thanks Mat. Much appreciated.

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Beginner 19th Feb 40 of 44

In reply to post #450008

Cheers Richard. I have a very small holding here, and will cling on for now.

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timarr 19th Feb 42 of 44

In reply to post #450143

The big news is the opening up of the US due to recent regulatory changes there which opens a window for on-line betting. I'm not close enough to the regs but I think it's state specific as well as federal. 888 are on top of this, recently buying out their US partner in their joint venture.

The Justice Department has moved to block this, issuing new legal opinion that online gambling is a violation of the federal Wire Act. Businesses have 90 days from Jan 15 to become compliant - i.e. shut down their operations. Behind this is the casino lobby led by Sheldon Adelson, who's one of Donald Trump's biggest donors.

Lots of debate about whether this is enforceable, but as the last time the US got heavy on online gambling they started arresting executives arriving in the States on holiday my guess is that most will comply.

On the other hand 888 Holdings (LON:888) is cheap regardless of the US situation.


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Reacher 19th Feb 43 of 44

In reply to post #449798

Thanks DJCP: your analysis of Duke Royalty (LON:DUKE) is very helpful. I'm pretty much coming back to the figures which you have outlined

For what its worth, I've calculated revenues of £5.1m for Y/E 31/3/2019 and this increasing to £10.5m once the investments are in an annualised cycle (no FX impact and no changes to royalty percentage).

However, they will have to value their unlisted investments and that introduces an element of subjectivity and potential volatility. I am very much looking forward to Graham's interview which will hopefully shed some light on their strategy of taking equity stakes and whether they intend to realise their holdings.

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abtan 20th Feb 44 of 44

In reply to post #449968

Excellent question re Realm Therapeutics (LON:RLM)

I went through today's disposal announcement to take a further (and first time) look at the company. You're right, there will be a $28.4m (£21.7m) cash balance for a company with a current market cap of £9.9m.

Yes, it will be US listed after the proposed asset sale - I'm not sure why this might be a material issue - and the only negative I can see is that the total annual wages are c£3.8m, of which £2.6m is for key management, of which £1.2m is for the 2 executive directors.

Could they give themselves massive pay rises for a few years after the disposal? I'm not sure. What about redundancy costs? Will there even be staff beyond the 2 executive directors after the sale? It doesn't look like it.

So if there are no operations if today's disposal goes through, then it looks like the company will most likely wind itself down, giving a quick (up to) 100% profit to anyone buying today.

Like you Beginner, I'm asking myself what am I missing.

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 Are LON:GRG's fundamentals sound as an investment? Find out More »

About Graham Neary

Graham Neary

Full-time investor and independent analyst. Editor at Cube.Investments, small-cap writer at Stockopedia. Previously a fixed income analyst in the City and institutional fund manager. I'm a CFA charterholder and have the Investment Management Certificate and STA Diploma in Technical Analysis for good measure. When I'm not talking about finance, I enjoy recreational poker, chess and Mandarin Chinese. more »


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