Small Cap Value Report (Tue 24 Oct 2017) - MCB, CPR, BMY, SHOE, G4M

24th Oct '17 by Paul Scott

39 comments 18831 reads

Good morning, it's Paul here!

I'm staying overnight at the Royal Oxford Hotel, after a busy & enjoyable day at Stockopedia HQ yesterday. My head's pounding, as Graham dragged me to "ATIK" for some boogying after we had waved off the rest of the team at the Red Lion, plus a few stragglers that we picked up along the way. I felt like a ball inside a pinball machine, as drunken youth constantly & unapologetically lurched into me. People now really don't have any manners at all, do they?

I can't even make myself a cup of tea, after reading a horrific article in the Guardian recently, which revealed the unspeakable things that people do with communal kettles in hotel rooms - weeing in them, or boil-washing their underwear apparently. No wonder the Guardian has such a tiny readership, and ironically only still exists due to the financial support of an offshore trust - it really is the most gloomy, negative publication imaginable. I'm so glad I'm not left-wing - life must be hell if you only see the negatives around you.

Anyway, whilst I conduct emergency rehydration, I shall attempt to review the trading updates today from: MCB, CPR, BMY, SHOE. The hotel are intending to throw me out of my room at noon, so that might cause some temporary disruption to this article.

EDIT: Thanks to Trident, for reminding me about Gear4Music results, which came out at an unusual time yesterday. I haven't actually read them yet, but my broker read out the key points to me over the phone yesterday, and there don't seem to be any surprises. European growth is the excitement there, and UK still growing strongly too. I'll cover that later, once I've found a decent eatery with WiFi in Oxford. The nice thing about having a clapped out old laptop is that nobody wants to steal it. That's why I also use a cheap phone from Argos, instead of all that fancy Apple business.

McBride (LON:MCB)

Share price: 215p (down 6.6% today)
No. shares: 182.1m
Market cap: £391.5m

Trading update - McBride describes itself as;

...the leading European manufacturer and supplier of Co-manufactured and Private Label products for the Household and Personal Care market

Today it is holding its AGM, and updates us on trading in the early stages…

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Hot Socks

24th Oct '17

You reminded me a letter I read once in Private Eye that went something like this:

"Dear Sir: I left school recently and wanted to say that all the teachers at my school love your publication and read it avidly. In fact they have a staff room copy which they share and laugh about together in their tea breaks, and they always read the letter pages. I also wanted to say that I snuck into the staff room and pissed in the kettle before I left."

I admit to finding it quite funny when I read it twenty years ago. I feel quite a bit more on the side of the teachers now - all that effort put into the nation's youth and what thanks do they get?

Anyway, if this is a widespread problem a pee proof kettle invention might be a good foundation for an IPO - or perhaps a pee tester you could check the kettle with before you poured your tea:)

Rusty2

Hope you don't leave your toothbrush in the bathroom for the cleaners to use.

goldenvision

Kettles: Surely you just boil and throw water away then refill and boil a fresh lot, where do you think water comes from anyway, its had all kinds in it and been filtered to death

I never mentioned kettles!

gus 1065

This thread reminds me of my first wife. I loved her dearly but had to get a divorce because of her disgusting habits. Every time I came home roaring drunk from the pub and tried to pee in the kitchen sink, it was always full of dirty dishes she hadn't washed up....

Coat please ...

Gus.

JohnEustace

As Oxford is upriver from me I’ll be drinking some molecules of Paul’s (suitably treated) pee tomorrow and it will be in London for him to take in again by the end of the week.

Plug

"I'll cover that later, once I've found a decent eatery with WiFi in Oxford".

Paul if there's one thing Oxford's not short of it's eateries (George Street - which you probably walked up to get to the Red Lion from your hotel - is 90% eateries) and WiFi.

BTW a couple of years back I recall there was going to be a Stockopedia meeting of like minds in Oxford (I live about 2 minutes from your hotel) but nothing happened. Any plans to make it happen? If so, I can show you some proper pubs etc.

Matboulton

Hi Paul,

You mention Topps Tiles (LON:TPT) in your column. The stock has taken a real hammering recently and often exchange rate / brexit is credited with this despite raw product being sourced and product sold domestically.

I'm a fan, any chance of some analysis?

Matt.

Lion Tamer

Hi Matt
Paul covered it on the 4th:
https://www.stockopedia.com/content/small-cap-value-report-wed-4-oct-2017-futr-tpt-ige-224918/

Miserly Investor

Hi Paul, quick question. On CPR you say "...There are lots of creditors over 12 months, which would need more investigation before I would consider a purchase."

How would one go about this? Call the company, look in last annual report? I'd be grateful to hear from anyone on how they would unravel a query like this?

Initially, it's best to look in the last report and accounts which will give more detail on balance sheet items. Head to the corporate website and find the 2017 annual report here:

http://www.carpetright.plc.uk/...

First, look for the balance sheet (page 67) where it gives the split between current and non current liabilities (i.e. those due within a year and those due after more than one year). As Paul says, you can see that the latter is quite high:

For more detail go to the notes 17, 18 and 20-22. For example, from note 20 you will see that the £17.5m on the balance sheet as "Provisions for liabilities and charges" is actually a provision for onerous leases. This means that where the company has either closed down stores, or has loss making stores, it immediately recognises the future costs of those leases as a liability.

It isn't always obvious though. Take for example the £34.5m for "Trade and other payables". All you will find from note 17 is that is relates to "Accruals and deferred income". This isn't particularly helpful as it doesn't tell you whether it is a future cash obligation (i.e. an accrual) or the deferral of income already received. The latter is likely, for example, to include the deferral of property incentives received on new stores (e.g. capital contributions, reverse premiums or rent free periods from the landlord).

If, after having been through the above process, you feel you need further detail which is not explained in the annual report, then it's best just to contact investor relations with your queries:
http://www.carpetright.plc.uk/...

Any company worth investing in should come back to you in a helpful manner :)

Hope that helps!
MI

VegPatch

Did I miss the £G4M comment somewhere ?
I am less enthusiastic than Paul about G4M and feel they could have a bit of a BooHoo type reaction to these results. Granted the business is growing fast, but come back to the old adage

"revenues are vanity, profits are sanity and cash is king".

I will explain

G4M grew revenues at 41% over the course of H1. TICK

Gross Margins went backwards by 160bps to 25.0% (same thing has been happening at Boohoo.Com (LON:BOO) as reinvestment into margin drives sales) so gross profits only rose 36%. CROSS

EBITDA went backwards from £1.3m to £0.7m as the business reinvested in new warehouses and the distribution channel. Net profit fell from £750k to zero. CROSS

So great revenue growth, but this was not accompanied by growth in profits or cash.

I have no issue with business reinvesting for growth. Amazon makes a virtue out of it (No I am not an investor in Amazon). But I do prefer businesses that grow profit and cashflow as they grow. £G4Ms profits have shrunk.

The business now has a small net debt position of £3m, even after the £4m raising in May but this will reverse i guess after xmas when customers have all bought loads of drums and speakers.
So a market cap of £160m looks pretty steep for not much profit. It hasnt stopped Netflix, AMZN or Tesla from continuing to rocket upwards. Nothing fundamentally wrong with G4M, it just looks on the expensive side to me. Expensive stocks tend to need upgrades to maintain their performance. I didnt get the feeling reading the results that one was being offered reading the text and looking at the shape of the numbers (but I havent got the housebrokers forecasts- Anyone have them ?)

Paul is much better at these retail growth stocks than me, so i will leave it to him but I will confess to a small short position (as a hedge against my other longs more than anything sinister)

Carcosa

25th Oct '17

[Paul] The point is that, once decent scale has been achieved, then the marketing spend (a major cost) reduces considerably.

I understand the logic being used here - the suggestion that EPS can rise significantly - but in practice I do not buy into the argument. Companies like these have to grow top line and perhaps marketing spend can decrease but then those 'savings' are used to fund other activities whether it be new distribution centres, acquisitions, R&D or whatever. If the nature of business is to have a good return on the investments then these companies are failing miserably. Examples are Netflix, Amazon, BooHoo and Gear4Music; but there are plenty of others. Those companies with large international expansion plans seem to be a moneypit as there appears to be no practical expansion limit.

I therefore suspect that when this current bull market comes to an end, the share prices of such companies will plummet like a stone. They may also fall like a stone due to business specific upsets so the margin of safety is negligible.

Of course, the 'problem' for investors is that by not being a shareholder you may miss out on huge, life changing gains before the market turns; or indeed life changing losses for the unwary.

Ramridge

Re. £G4M Unless I am mistaken, Paul's view is that in the short to medium term this company's share price may drift, but in the long term he is confident that G4M will become a stellar global ecommerce company.

I have my doubts. If you look at ASOS and BOO, they throw up decent operational cash flows, the stuff needed to pay for capex and fuel growth. I calculate that over the past 3 years (2015 to 2017) each of these two companies had an operational cash flow / sales ratio in the range 8% - 10%.

G4M on the other hand shows OCF/ sales ratios of 6.4%, -1%, 0.2%, for years 2015, 16 and 17 respectively. Which means G4M will have to rely to a significant extent on external debt or raising cash through equity to become a global player. Not impossible but the risks are piling up.

cig

It may look better in the accounts if they capitalised more of their investments. They seem to be pretty conservative here (see relatively small intangible assets for instance).

andrea34

in response to the comment on CPR "At some point though, this share could get interesting. I'd struggle to choose between this and Topps Tiles (LON:TPT) though - probably TPT has more appeal, due to its 5% dividend yield"... why not plump for VCP instead, largely the same sector but compared to both CPR and TPT they are doing staggeringly well and recently received an uplift after the latest sizeable acquisition in Italy.

Paul Scott

26th Oct '17

Hi Trident,

Paul. I notice Ramridges observations yesterday on £G4M that given they have not hit H1 expectations (£0 NP), there is all the more to make up for in H2. How realistic is that in your view even with an expected H2 weighting to total year end results?

I'm not sure where you're coming from with this.

If you read the latest Panmures note, it says that G4M H1 results were slightly ahead of forecast.

The plan was always to load up extra costs in H1, to drive H2 and future growth. So everything's going as planned basically.

Regards, Paul.

Hi MatBoulton,

Yes, I covered Topps Tiles (LON:TPT) here about 3 weeks ago:

https://www.stockopedia.com/co...

It looks quite good, and is on my watchlist.

Hi Ramridge,

I think that's wrong. For a start, Asos doesn't really generate any free cashflow, and never has done. Just look at its surprisingly small NTAV position on the balance sheet - and it's never paid any divis I think either. So all it manages is to generate just about cash to fund its own capex. Last year it capitalised £104.5m of IT spend, which consumed more than half of the operating cashflow. So Asos is nowhere near as good a business as people seem to think it is! Hence why I am short.

BooHoo on the other hand is much more cash generative, relative to revenues. Although it now also has massive capex plans to automate its warehouse.

G4M is really not comparable, as it's much smaller than either, and in a different niche, where there's no issue with product obsolescence, etc.

I think G4M investors understand that the historic numbers don't really matter very much. It's a land grab for market share, and the business is pretty much self-funding. The small amount of debt taken on was to pay for a new freehold HQ. A small equity raise made sense, given how high the shares had risen. Apart from that, it's growing at a stellar, organic rate, and should be self-funding from now on. That's a very attractive proposition - which is why there's relentless demand for the shares. Institutions want to own this stock, and you can nearly always get a decent sized bid if you try to sell some. My broker & I reckon there are multiple institutions in the market, hoovering up sells from private investors. It's just a stock that Instis want to own, so it's probably going up more. There are very few businesses that are growing so strongly organically, and successfully expanding overseas too. To a certain extent, whether it makes breakeven, or a couple of million profit this year, is largely irrelevant. Investors are in this share for the big growth, not the short term profits.

I think the other thing you've overlooked, is that G4M is taking on extra overheads on a discretionary basis. So management are deliberately ramping up overheads in distribution centres, staff, marketing, you name it. They're going for it, in terms of growth. All those things involve up-front costs, then a delay until the benefit is felt in terms of extra sales & growth. So you're missing the point by fixating on current, or historic ratios, etc. They're not that relevant. It's what happens say 2-5 years out in future that is what the share price is based on. Some people may not want to get involved in that kind of share, which is fine - whatever floats (or not) your boat!

Hi Paul - Re. £G4M
There are a few points of detail and interpretation in your reply which I would disagree with, but let's just stay with the big picture.
The key question is, will this company become in 5 years time a "stellar global profitable ecommerce enterprise".
Well, you set out your stall and you are very confident. I for one will remain sceptical.

Best wishes, Ram

5th Jan '18

Decent 4 month trading update from £G4M this morning. Revenue rather than profit figures so only part of the story at this stage but overseas business in particular is growing at a fair clip. Highlights below:-

Gus.

———————
Highlights

· 42% increase in total sales with continuing strong growth into the UK and Europe during an important trading period

· On a two-year basis, sales growth was 120%, ahead of the 114% for the same period last year

· Both Own-brand and Other-brand revenues grew by 42% during the period

· Active Customer numbers up by 38% to 450,000 at 31 December 2017, compared with 31 December 2016

· Website conversion improved to 3.3% in the period, up from 3.0% last year

Small Cap Value Report (Tue 24 Oct 2017) - MCB, CPR, BMY, SHOE, G4M

McBride (LON:MCB)

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Paul Scott

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