Small Cap Value Report (Tue 25 Sep 2018) - NXT, PKG, CMCX, RDL, SUS, SWL | Graham Neary

25th Sep '18 by Graham Neary

40 comments 11065 reads

Good morning - this feels like one of the busiest days of the years for company news. Three shares I own have made announcements, plus a very long list of others.

The list finished up as:

Next (LON:NXT)
Park (LON:PKG)
CMC Markets (LON:CMCX)
Ranger Direct Lending Fund (LON:RDL)
S&U (LON:SUS)
Swallowfield (LON:SWL)

Next (LON:NXT)

Share price: £55.64 (+8.6%)
No. of shares: 140 million
Market cap: £7,773 million

Results for the Half Year ending July 2018

(Please note that I currently hold NXT shares.)

This half-year report is a long document. But it's not a long list of random and disconnected statistics - far from it. It's truly a narrative that shows you how the business has performed and how management are planning for the future.

Future MBA degree courses (maybe current ones) should use Next's investor results presentations as the material to demonstrate successful leadership:

how a retail business survived the move online
how to communicate with the outside world
how to plan for change
how to manage costs, margins and cash flows

Perhaps I'm getting carried away. Next itself will admit that the future is highly uncertain and that it faces major cyclical and structural challenges. The "endpoint" of so much change in retail could yet turn out to be bleak for Next and its shareholders (including me!)

Next shareholders are enjoying the twin benefits of a company that A) reports in a detailed manner, and B) reports punctually.

Even in a bear-case scenario, these detailed reports will at least help to us to understand what happened and why. We will know which assumptions turned out to be false. We will see the trends that led to failure. There are so many small-caps where their stated reasons for disappointing leave so much unsaid.

Secondly, note that these are half-year results forJuly! The average small-cap with decent financial controls is a month behind. One of the surprising benefits of big-caps is how quickly they can get their numbers out, compared to small-caps.

Let's consider some of the main features of these results:

Total full-price sales up 4.5%, total sales up 3.9%…

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£m

2019-H1

2018 H1

FY 2018

PBT (statutory)

1.31

-2.28

-0.01

Acquisition-related deferred consideration and earn-outs

1.50

0.68

1.85

Costs of acquisition

2.63

0.96

0.92

Net foreign exchange differences

-3.59

-0.02

0.15

PBT (Gromley adjusted)

1.85

-0.66

2.91

MrContrarian

25th Sep '18

My morning smallcap tweet:

WYG (LON:WYG), RhythmOne (LON:RTHM), Alpha FX (LON:AFX), Low & Bonar (LON:LWB), Learning Technologies (LON:LTG)

WYG (WYG) H1 trading. Expectations for the full year are unchanged despite H1 only broadly in line with previous year. "Actions taken to improve the efficiency and profitability of the business have offset some softness in trading...some delays in opportunities coming to market and a slower ramp up of activities on certain existing projects, alongside a high level of bidding costs falling within the period."
RhythmOne (RTHM) CFO resigns after 6 years. He is not thanked. New one appointed. Trading in line.
Alpha FX Group (AFX) Guides FY ahead of current market expectations.
Low & Bonar (LWB) warns FY profitability significantly lower than previously anticipated. Blames higher costs and continuing Coated Technical Textiles production issues hitting margins.
Learning Technologies Group (LTG) H1 rev up 60%. Guides FY profit significantly ahead of the Board's expectations.

slopsjon

Card Factory (LON:CARD) interim results. Revenue 32% LFL (0.2%), EBITDA (8.9%), 5p special dividend. Expects EBITDA to be 89-91m for year.

LeoInvestorUK

Today's Next (LON:NXT) report is, as ever, an incredible free resource for holders and non-holders alike. The section about their preparation for a no-deal Brexit is particularly interesting. They do present some Brexit opinion, but this is appropriately placed and well signposted in strong contrast to Tim Martin's diatribe in Wetherspoon's last report.

While I wonder if they give too much information away to competitors at times, these reports are the gold standard and give me supreme confidence in the management of Next (LON:NXT).

gus 1065

I note in the generally awful Low & Bonar (LON:LWB) profit warning that the CFO is leaving the company as soon as a suitable replacement can be found. Shouldn’t be too hard as most of the CV’s of the previous job applicants will be quite fresh as he only joined in April. This time last year it was a Super Stock with a SR of 92 .....

Gus.

Wol

I’d be very interested in your thoughts on the Learning Technologies (LON:LTG) H1 results. The overall message is excellent with the existing business and new acquisitions firing on all cylinders. “...full year profit will be significantly ahead of the Board's expectations."
My two concerts are:
1. The riskiness of such an acquisition based growth strategy
2. Learning Technologies (LON:LTG) are reporting an H1 profit (vs a loss in H1 last year) but this profit seems to include a net foreign exchange difference of £3,591k. Without this foreign exchange gain they would, if I am reading this correctly, have reported an H1 loss broadly equivalent to last year. Have I read this right? If so how come this is not mentioned in the gushing commentary? What will happen to the results when the exchange rate is not so favourable?

I would be very interested to hear whether anyone else reads this as I have or whether I have misunderstood. Thanks.

The Phoenix

Next Fifteen Communications (LON:NFC) if you have a chance profits up and has been trending up over time, does seem to move around on small volume. though.

bongo

Would also be interested in views/coverage on Learning Technologies' (LTG) results this morning...

iwright7

Graham - Alpha FX (LON:AFX) have announced bumper new (European?) client sales during September saying; Given the strong sales performance, the Board anticipates that the results for the full year ending 31 December 2018 will be ahead of current market expectations". Would be interested in your take so soon after +ve interim results only 2 weeks ago? Ian

GrowthStocks

I second this if possible please

andrea34

I would be interested in the following please Graham:

S&U (LON:SUS) as, with 17% growth in the interims, they are on target to meet broker expectations but the PER is only just above 10. My only concern is the slightly high gearing.
Next Fifteen Communications (LON:NFC) - on the surface, they look quite good value... but the financial results seem to me to be awash with significant adjustments which make me weary.
Premier Technical Services (LON:PTSG) - the results look pretty good, but the performance within the divisions is somewhat mixed.
Learning Technologies (LON:LTG) - this is obviously making some people on here some good money, and well done to you all for taking the plunge when I didn't at around 48p. Being somewhat more value-based in my judgements, I struggle with the valuation... as does Stocko with a Value Rank of 1. One of my criteria for investing is generally is that the value should at least be around 20, even if I am more QM focussed these days.

Mark Tughan

Anyone Interested in Brighton Pier (LON:PIER) ? Somewhat uninspiring results today...

It's a Luke Johnson vehicle, owns Brighton Pier, a collection of bars that used to be part of the old Po Na Na (Aim) business and a recently (I think quite expensively) acquired "experiential leisure" indoor golf business that may have some growth in it.

Wider strategy is to be a consolidator in so called experiential leisure.

Bars looks like a turnaround coming good. Overall it appears (to me) to be a good team, managing well, in difficult conditions.

Market completely uninspired though with this!

Another announcement today (and results tomorrow) is Corero Network Security (LON:CNS). The announcement today is that it has "entered into a non-exclusive, multi-year global resale partnership agreement with Juniper Networks (NYSE: JNPR), an industry leader in automated, scalable and secure networks, to resell Corero's SmartWall software products and services". Results tomorrow - will be a much reduced loss on about $5m of revenue.

Market appears to be much more interested in this, but it might be argued that there's already a lot of hope baked in to it's current valuation. Could be worth commenting in more detail tomorrow?

Rusty2

Learning Technologies (LON:LTG) thats how it looks to me. WOuld be interested if Graham could take a look into that.

TamzinPiworld

Gosh, it's results season! In case you think there's too many for one day, here's another to prepare for!

Amryt Pharma (LON:AMYT) have results tomorrow. Here's the presentation they gave at ShareSoc September, a few weeks ago.
David Allmond, Chief Commercial Officer gives a great overview of the business.

https://www.piworld.co.uk/2018/09/25/amryt-pharma-amyt-investor-presentation-at-sharesoc-september-2018/

Oh, another one I'm interested in an opinion on (from someone if not Graham, who is already drowning in possibilities to write about) is Sigma Capital (LON:SGM) whose interim results look very good with revenue £4.8m+168%, eps 4.62+305% which are better than the whole of last year with the second half seen even stronger.

johnsmith68

Next (LON:NXT) seem to represent the gold standard for clarity and management competence in retail (and perhaps any sector). Their results presentations, as many have pointed out, are measured, detailed, and provide fantastic insights to the wider economy. With this in mind, I wondered what other companies (large or small) might populate a top ten list of similarly open, honest, insightful and well managed businesses. I'd love to hear opinions on this from readers and Paul and Graham if people have the time to jot down their favourite Next-like businesses. Thanks all.

ISAallowance

Burford Capital (LON:BUR) produce beautifully written very clear reports, although they are (quite openly) very secretive about some of what goes on under the hood.

JDW72

It is a cracking set of results from Sigma plus the announcement of a maiden dividend.

I am meeting the management tomorrow if anybody has any questions just let me know on this thread.

mojomogoz

On Corero Network Security (LON:CNS), quick calc says they have likely lost $2.5m cash over H1 2018 (although net cash up due to $5.2m equity raise and $4.2m term loan)

There appears to be some historic seasonality to revenue so will be interesting to read results as 40% increase on H1 2017 is good if seasonality assumed to be fixed pattern.

The valuation on this stock is somewhat supported by a continual bid by the chairman... particularly when it comes to placings. How deep are his pockets? I think he owns 40-50% of equity.

Gromley

Learning Technologies (LON:LTG) are reporting an H1 profit (vs a loss in H1 last year) but this profit seems to include a net foreign exchange difference of £3,591k. Without this foreign exchange gain they would, if I am reading this correctly, have reported an H1 loss broadly equivalent to last year. Have I read this right? If so how come this is not mentioned in the gushing commentary? What will happen to the results when the exchange rate is not so favourable?

Whilst this is true, I think if you want to get a true picture of the underlying performance there are other adjustments. My view would be

£m	2019-H1	2018 H1	FY 2018
PBT (statutory)	1.31	-2.28	-0.01
Acquisition-related deferred consideration and earn-outs	1.50	0.68	1.85
Costs of acquisition	2.63	0.96	0.92
Net foreign exchange differences	-3.59	-0.02	0.15

PBT (Gromley adjusted)	1.85	-0.66	2.91

You could argue that the acquisition related costs are not "exceptional" if they are going to continue to be acquisitive, however I do think this adjusted gives the accurate position of how the business is performing ongoing.

The company themselves take a more aggressive view of 'adjusted' , excluding a number of other items, most notably Amortisation of acquired intangibles (£5.7m) and share based payments (£0.6m). We have discussed aggressive adjustments a number of times here and I certainly would not want to exclude those items.

Small Cap Value Report (Tue 25 Sep 2018) - NXT, PKG, CMCX, RDL, SUS, SWL

Next (LON:NXT)

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Graham Neary

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