Small Cap Value Report (Tue 4 Sep 2018) - SFE, MBH, UTW, SEE, CAMB, DSG, GATC, MCLS, JSG, KOOV, DAL, SFR,

19th Sep '18 by Paul Scott

44 comments 14102 reads

Good morning!

Firstly, I've added a quick comment on an interesting announcement from a double-glazing company, which slipped through the net yesterday.

Safestyle UK (LON:SFE)

Share price: 47.9p (up19.8% yesterday, at market close)
No. shares: 82.8m
Market cap: £39.7m

Settlement of Litigation

This double-glazing company floated in Dec 2013, and for several years delivered good results, and rising divis. It all started to go wrong in July 2017. As you can see from the chart below, this is a great example of how it's often best to sell out (if you can) on the first sign of trouble.

The bad news seemed to come out in stages. I've just re-read mine & Graham's articles here in the archive, reporting on each profit warning. The red bars are clearly showing on the candlestick chart above, reflecting each time the company put out another profit warning.

It's interesting to see that in each case, Graham and I commented on how the company looked cheap after each profit warning. However, with earnings forecasts constantly falling, it turned out to be far from cheap. Thankfully we both remained fairly sceptical about the company, and managed to avoid getting caught out catching the falling knife.

It transpired that, apart from cost increases, the big problem seemed to be a new competitor which, I am told, poached staff from SafeStyle, and traded under the name SafeGlaze UK (also known as NIAMAC).

Safestyle launched legal action, described today as being;

... for alleged trade mark infringement, passing off, misuse of confidential information, malicious falsehood and various other matters.

A settlement has been reached, but no financial details are given;

In the settlement, NIAMAC has agreed that the existing court injunctions will be replaced by appropriate undertakings to the court. The settlement ensures that there will be no misuse of confidential information or misleading statements to customers. The settlement governs future relations between Safestyle UK and NIAMAC to prevent the possibility of any acts of intimidation or harassment of Safestyle UK representatives. In addition, SafeGlaze UK has agreed to change trading name and rebrand fully within an agreed period of time.

Further details of the settlement will remain confidential.

My opinion - this clearly seems to be a…

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LeoInvestorUK

4th Sep '18

Intraday profits warning from Seeing Machines (LON:SEE) - FY2019 revenues materially below expectations due to ongoing manufacturing issues.
https://www.londonstockexchange.com/exchange/news/market-news/market-news-detail/SEE/13778092.html

Quite apart from the short-term financial impact, this must affect their credibility as a supplier?

Also they say further OEM sales announcements within the next few months rather than imminently.

Edit: I have managed to sell most of mine. I think they have something valuable but they don't seem to be able to execute. I wonder if they now need to raise more money and will exclude private shareholders again?

Howard Marx

The answer is clearly yes given that prospective profit growth is not the only determinant of the appropriate p/e.

The other key determinant of a forward p/e is riskiness of future profitability, which is driven by factors such as:

quality of franchise (Craneware (LON:CRW) has gross margins of 94% & operating margins of 28%)
quality of Balance Sheet
optionality for future growth

danielbird193

I think the rating reflects the fact that they have a significant pipeline of new hotels and extensions opening over the next three years. If the expansion continues to be earnings accretive (as it has so far) then a PE rating of 16ish doesn't seem overly aggressive in the current market.

The EBITDA bridge table on p.10 of the results announcement helpfully splits out the growth between new openings and like-for-like sales. It looks like both have increased profits in the 12 months to 30 June, albeit at a slightly lower margin.

sbotting

I hold some Bilby (LON:BILB) not sure what to make of this, seems strange that everything is going pretty well and both father (Deputy Chairman) and son (COO) decide to leave completely selling up and not even staying on as non-execs.

Does anyone else have any thoughts or experience of this type of event in other companies?

Paul Scott

Loads of reader requests today!
I'm taking a break now, but will post some brief comments later on;
Taptica, Dalata, Severfield, Filta, Codemaster & Boku

There are too many companies reporting today for me to be able to report in detail on everything, hope you understand!

Best wishes, Paul.

unwise2

Am I the only one that thinks its strange that Taptica said back in mid June that EBITDA would be "moderately ahead of market expectations" ( which at that time was roughly the same as 2017) and then today they report an increase of nearly 65%?

Great for holders but the results today look very different to guidance given less than 3 months ago.

paraic84

There is an article on ThisisMoney from earlier this week about Boohoo (LON:BOO): http://www.thisismoney.co.uk/money/news/article-6122477/Love-Island-outfitter-Boohoo-eyes-sales-1-5billion-three-years-targets-growth.html (Apologies if it has been posted already but I couldn't see it).

The article seems to have been briefed in by £BOO's broker and suggests they can double sales in 3 years. This seems to be above previous recent broker estimates because the previous 2020 estimate was for just over £1bn with growth falling to around 30-40% per annum over the next couple of years.

There is also a question about why is it being briefed in? Probably just to stem the current share price decline.

Wimbledonsprinter

I held Michelmersh Brick Holdings (LON:MBH) until about a year ago. So my knowledge is a bit out of date, as now I only have a passing interest in the stock. On the development land potential, there was a note from Cenkos, in October 2016, which said that there was £12 million of land with redevelopment potential on the balance sheet. This was before the sale of land at Dunton (which was sold for £2.68 million in June 2017, for an uplift over book value of >£1 m). Therefore, I would assume that there would be about £10 million of land with development potential left on the b/s, assuming the Carlton site in Barnsley (purchased June 2017) has no such land - at least this was not mentioned as a reason for buying Carlton.

My reading of this is that the “land play” is a much smaller part of the Michelmersh investment case, than it used to be before the Carlton acquisition and when the stock was trading at close to 50p upto March 2017, at which time the stock price was below tangible book value. I think now this offers less support (mostly because the enterprise value is considerably higher) and investors have to be confident in the brick market.

gus 1065

Hi sbotting.

Re. the Bilby (LON:BILB) announcement, you’ve presumably read Roland Head’s follow up comments posted this morning. He seems reasonably relaxed about the retirement/share placement. Playing devil’s advocate, there’s always a risk when insiders close to a business appear to cut and run suggesting they know something bad that has not been disclosed to the wider market. Hopefully the broker and institutions that placed/took the shares have done the necessary due diligence and it’s all above board.

In terms of other precedents, an obvious one that springs to mind was Van Elle Holdings (LON:VANL) , where the Chairman (Ellis) retired/sold out of a fair chunk of the business he founded and then either bored with retirement or non plussed at the way the company was being run in his absence tried to get himself and his son in law voted back onto the board by calling an EGM. He also called to have the CEO removed (who in the event left for reasons of ill health). All ended up being a bit of a soap opera and from memory Ellis’s resolution was defeated but caused a fair bit of bad publicity and may well have had an adverse effect on on the underlying business (due to the slanging match between the interested parties putting off prospective customers). Hopefully nothing similar brewing here but time will tell.

Gus.

David Cheong

The adjusted EBITDA is the usual EBITDA plus the exclusion of effect of 'Share-based payments' expenses .... this 'Share-based payments' seems to have increased significantly compared to 6months ago, from USD 884,000 to USD 3,835,000. Looking at Note 4, it seems most of this increase is due to 'New Grants during the six month period ended June 30,2018'. I'm not 100% sure how to interpret this as to whether it is bad (red flag) or normal, but I'm guessing its normal to reward employees with stock options, etc.

Zipmanpeter

Michelmersh Brick Holdings (LON:MBH) reads as positive for brick builders, confirming low stocks of bricks and high level of imports. If sterling declines, this might create a pricing opportunity for the UK based tri-oply (?) of Ibstock (LON:IBST) Forterra (LON:FORT) and Wienberger (90% of UK supply to push prices as their claimed utilisation rates >90%). Demand is likely to stay strong regardless of Brexit since housing now a broadly agreed political priority and (Ibstock claim) brick facades are only 2% of total build costs ie even if house prices cool new builds will continue as builders replace margin with volume.

Ibstock (LON:IBST) have fallen back 18-20% recently (290-300p over AMJ18 to 240p now) after announcing short term need for more maintenance work to sustain/increase volumes. This is a 'good reason' for a profit shortfall. They also have a 100mn pa brick factory (+/-5% UK demand) coming on stream which was a key reason for IPO. Execution/white elephant risk falling - evidenced by recent special dividend 6.5p on top of regular, rising 4% dividend?
I already hold Ibstock (LON:IBST) and think I will buy more.

JohnEustace

Seeing Machines (LON:SEE) is 11% owned by a Malaysian contract electronics manufacturer called VS International. They bought in in 2016. So putting two and two together I think that SEE are a bit constrained in looking elsewhere for solutions to their manufacturing issues.

FREng

One of Paul's favourites, Sosandar (LON:SOS) are up 10% today on no visible news.

-1

ezlifeme

Paul, I hope you aren't reading this and you are genuinely finishing your book.
Your return and the volume of excellent analysis and especially COMMENT are very much appreciated
So please maintain the LWB - (Life,work,balance)

ricky65

"Losses for early stage growth companies are acceptable if;

(a) Revenues are rising at triple-digit percentages year-on-year, and

(b) There is a strong gross margin (ideally 50%-ish) delivering great operational gearing."

Agreed. Worth noting that earnings are going to have to kick in if the share price is going to have a sustained increase.

re Sosandar (LON:SOS) rise. Perhaps Paul Scott has been gobbling up all the stock!

Reasons for feeling Bearish ...

Below are the opening two paragraphs of the latest update from Hussman Market Comment:

"Last week, the [US] stock market recorded the most offensive valuation extreme in history, on the basis of measures best correlated with actual subsequent returns across a century of market cycles. The advance brought the S&P 500 Index about 1% above its previous January 26 record. The current extreme eclipses both the 1929 peak, and the 2000 bubble peak.

I am aware of no plausible conditions under which current extremes are likely to work out well for investors. There are a few possibilities that could involve a smaller loss than the two-thirds of market capitalization that I expect to vanish, as the run-of-the-mill, baseline expectation for the S&P 500 over the completion of this cycle. Yet it’s worth recognizing that the completion of every market cycle in history has taken the most reliable valuation measures we identify (those best correlated with actual subsequent S&P 500 market returns) to less than half of current levels."

https://www.hussmanfunds.com/c...

dfs12

5th Sep '18

Hi Paul, Mammoth report. Picking up on one of your throwaway comments.... Microsoft should get an award for the number of times its messed up one of its perfectly good products. Often these are products Microsoft didn't originally develop themselves but purchased because they were good. I have been waiting for them to mess up Excel. It has largely remained unbuggered up for the last 20 years or so - but it seems Microsoft has finally got it - almost completely ruined now. What used to take 1 second now involves minutes of search, only to fail to find what you are looking for. And they don't just limit themselves to software packages... just think of all the web based platforms destroyed. It continually amazes me that they are still going! Many thanks for all the graft!

Hi dfs12
I expect you have never upgraded your "BrandZ" phone for the latest model and found that all the features are there but the ergonomic, customer focus group, marketing work over means nothing is where you are used to finding it
Yes I'm a luddite at heart too - Change for the sake of it!

Lion Tamer

6th Sep '18

Re Microsoft Excel being messed up
Agreed. I now use the Libra Office suite https://www.libreoffice.org/. File compatible, intuitive to use (in the traditional sense of having logical menu structures rather than the modern definition of intuitive that seems to mean designed by Fisher Price), and open source / free. No going back.

Small Cap Value Report (Tue 4 Sep 2018) - SFE, MBH, UTW, SEE, CAMB, DSG, GATC, MCLS, JSG, KOOV, DAL, SFR,

Safestyle UK (LON:SFE)

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Paul Scott

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