Small Cap Value Report (Tue 6 November 2018) - VCP, FDP, CNCT

Tuesday, Nov 06 2018 by

Good morning! 

Today we are looking at:

This section by Paul Scott:

Victoria (LON:VCP)

  • Share price: 410p (-5%)
  • No. of shares: 125 million
  • Market cap: £514 million

Update on bond

We had an interesting debate here (Mon) and here (Weds) last week about Victoria (LON:VCP) - issuing a profit warning, and simultaneously announcing that it was seeking to issue a junk bond to repay all its bank borrowings. This spooked me, and after various accounting shenanigans lately (such as CAKE, and YU.), my approach is this - if in doubt, run for cover. We can always buy back later. When writing last week, neither Graham not myself held any position in VCP shares - so as always, we were just giving our honest opinions, based on the facts available.

Graham took a more relaxed view, and gave an interesting alternative assessment of the situation, thinking that a bond issue seemed a good idea, and giving his view that the BB credit rating was not a worry.

The latest announcement today, says that the bond issue is being abandoned, as indicative pricing was too high. That's not at all surprising to me. After all, VCP has a stretched balance sheet, with too much debt. Plus it's just issued a profit warning. So why would anyone want to lend it money cheaply?

Management today says;

It is very disappointing that despite the positive, stable credit ratings, the indicative pricing for the Bond moved unfavourably over the course of last week, particularly when there have been no fundamental changes to the Group or its business.

Possibly the pricing moved because the company issued a profit warning here? The wording of that statement seemed to try to gloss over the negatives, but it was clearly a profit warning, and the market was not fooled. The share price plunged 25%, closing at 455p on the day of the main announcements (29 Oct 2018).

NB. my negative commentary on the situation was not published until the evening of Monday 29 Oct, after the market had shut, by which time the main damage to…

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

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Victoria PLC is a designer, manufacturer and distributor of flooring products. The Company's principal activities are the manufacture, distribution and sale of floorcoverings. Its segments include UK and Australia. It manufactures wool and synthetic broadloom carpets, carpet tiles, underlay and flooring accessories. In addition, it markets and distributes a range of luxury vinyl tile (LVT) and hardwood flooring products produced by third-party manufacturers. Its product offering in the United Kingdom ranges from both crafted, woven Wilton carpets to Tufted carpets in a myriad of fashion colors and styles. Its stock range offerings cover saxonies, tonals, velvets, twists and natural loop pile styles for residential use. The Company supplies its products to the mid to high end residential market and contract sector both in the United Kingdom and overseas. Its subsidiary, Munster Carpets Limited, is engaged in the manufacture and distribution of floorcoverings for the contract market. more »

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First Derivatives plc is engaged in the provision of a range of software and consulting services, particularly to finance, technology and energy organizations. The Company provides software solutions that address data challenges, particularly those involving large data volumes and streaming data, across a range of sectors. Its segments include Consulting activities, which include services to Capital Markets, and Software activities, which include the license of intellectual property and related services. Its products are built on kdb+, a time series database developed by the Company. Its software applications enable the real-time capture and analysis of market data. Its consulting customer base includes investment banks, brokers, exchanges, regulators and hedge funds. The Company's subsidiaries include Activate Clients Limited, Affinity Systems Limited, Cowrie Financial Limited and First Derivatives Canada Inc. more »

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Connect Group PLC is a United Kingdom-based distributor operating in newspaper and magazine wholesaling, and mixed freight distribution. The Company operates in three segments: Smiths News, DMD and Tuffnells. Smiths News segment distributes newspapers and magazines to retailers across England and Wales from its 39 distribution centers. DMD segment supplies newspaper and magazines to airlines and provides inflight services. Tuffnells segment provides next day business to business (B2B) delivery of irregular weight and dimensions consignments. Smiths News distribution network includes six hubs and 33 satellite depots. DMD supplies printed and digital media to travel points. Tuffnells provides parcel freight services for small and medium-sized enterprises. The Company’s subsidiaries include Smiths News Holdings Limited, Dawson Media Direct Limited and Tuffnells Parcels Express Limited. more »

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

33 Comments on this Article show/hide all

MBFP 6th Nov '18 14 of 33

Morning Graham,

Any thoughts on Elecosoft's acquisition today? Appears to be a good product fit to me.


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rhomboid1 6th Nov '18 15 of 33

In reply to post #416004

Airea (LON:AIEA) is in a totally different space to Victoria (LON:VCP) as their product range is synthetic carpet tiles for commercial premises..especially where there are high traffic or very specific design characteristics required

Typically they are interior designer specified as part of the construction or refurbishment project ...much more akin to James Halstead (LON:JHD) albeit with a different product

They are currently expanding their range & growing their market coverage in terms of price points/design options (permitted by their new mega loom) and more interestingly they are growing exports fast & signing new international distributors

I hold a v large position in Airea (LON:AIEA) & believe it to be at the start of a major growth phase driven by recent Capex & the massive restructuring leaving the core Burmatex business a little understood hidden gem...

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Graham Neary 6th Nov '18 16 of 33

In reply to post #415999

Hi weasel, taking a look at First Derivatives (LON:FDP) now. Cheers. G

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Camtab 6th Nov '18 17 of 33

In reply to post #416019

Thank you rhomboid1, that is useful. For clarity it is a company I have been looking at since Paul mentioned it a while back.I have a small position and continue to look for confidence to build it. Given that Victoria is acquisitive and presumably needs a bit of good press I wondered if they might be in the market to buy Airea for the very same reasons you mention. But their balance sheet is weak and that for me probably rules against it.

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Owen001 6th Nov '18 18 of 33

Hi Graham _ could you have a quick look at Castleton plc (CTP) if time allows.

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Aislabie 6th Nov '18 19 of 33

It appears that Invesco has taken up a large slice of Patisserie Holdings (LON:CAKE) (how nice to be able to say that!) which will presumably give Luke Johnson some help in reestablishing the company's credibility. The investment is for 7.76% of the company and would I imagine be part of the previously announced share raise. With the shares still suspended it is not yet possible to see the effect on the share price.

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Camtab 6th Nov '18 20 of 33

In reply to post #416019

One further question if I may Rhomboid1. What is the size of the market they can profit from? I cannot see margins rising much above 7% (my guess). Lets say their rev doubles which would be a real achievement. So £44m at 7% is a profit of £3.08m.They have 41,341,353 shares in issue according to Stockopedia. Each share is earnings 7.4p. On 10 times 74p. You currently pay 55p which is a capital return of 34% over a discriminate period. Back of stamp calc but it doesn't excite me enough to buy a big holding maybe I have answered my own question.

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Gostevie 6th Nov '18 21 of 33
That's all for now. I'm taking a break for a few weeks, see you in a while!

Enjoy your break Graham. Thanks for all the SCVR analysis and see you at Mello.


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Camtab 6th Nov '18 22 of 33

All the best Graham.

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mammyoko 6th Nov '18 23 of 33

Great analysis Graham. Enjoy your break

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andrewjames 6th Nov '18 24 of 33

If I was a Victoria (LON:VCP) shareholder, I would not be particularly happy with recent events. I would also be asking some serious questions of my financial advisor. I completely understand why the company would have looked at a bond deal, but they are relatively small fry in those markets and I wonder if they really understood what they were doing in this field. Worse, if you announce it and then back off, it suggests a lack of understanding/competence. Bond issues work for very experienced customers who know what they are doing and take expert advice. For the rest, it can very easily end in tears. It might well have been the correct end decision, but it has caused a lot of uncertainty.

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Weasel 6th Nov '18 25 of 33

In reply to post #416024

Thanks Graham, always good to have another opinion, especially from yourself (or Paul when he's on duty).

Enjoy the well earned break.

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rhomboid1 6th Nov '18 26 of 33

In reply to post #416084

I’ve looked at (companies house or US10k filings) all the companies that Airea (LON:AIEA) competes with...they mostly have v handsome margins & are highly cash I say James Halstead (LON:JHD) is the closest U.K. comparator and they do well on margins.

My view is there’s a vast (beautifully carpet tiled) runway ahead of Aeria ..not least from picking up projects where James Halstead product has been historically specified but where a less utilitarian carpet tile solution is now robust enough to be considered...if you download the spec sheets from the Burmatex site for their new ranges you’ll see what I mean .

In summary I can see this being a multiple of the current M’Cap in the next few years..not least as at the last AGM they were already talking about potentially needing another new mega loom to accommodate growth.

..and whist we wait the hefty dividend stream is handy

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jesseowens 6th Nov '18 27 of 33

In reply to post #416084

Six months to June 2018 of Airea (LON:AIEA) accounts show continuing operations had a turnover of £9.13 million and operating profit of £1.48 million, so operating margins around 16%. Given the chairman's optimistic outlook statement and the deferred tax asset it seems reasonable to hit that £3 million profit figure by the end of the year....

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Graham Neary 6th Nov '18 28 of 33

In reply to post #416094

Thanks Camtab.

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Graham Neary 6th Nov '18 29 of 33

In reply to post #416104

Thanks mammyoko! G

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brileen 6th Nov '18 30 of 33

Have a good break and thanks for your expert analysis.

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Gromley 6th Nov '18 31 of 33

I had a brief scan of the Connect (LON:CNCT) results this morning before going out and found myself scratching my head as to what to pick out.

I think Graham definitely hones in on what has been (and potentially still is) the key potential value characteristic - CASHFLOW. Even in this tumultuous year, positive cashflow still stick outs.

In fact though, I think Graham slightly understates this figure citing FCF of £20.2m - in fact this includes negative £8.3m cashflow relating (I think) to the closure of Pass My Parcel.

On the other hand, I do not accept that cash used to fund the pension deficit recovery plan (£4.7m) should be considered part of FCF (I might be inventing another "GromleyRatio" if I'm flying in the face of convention here).
To my mind real free cash flow was £23.8m (in a bad year).

I also though differ with Graham on the point : " I would be more excited about Connect if it was going to sell or shut down Tuffnells."

Sell might be okay (at the right price) but shutdown absolutely not.

The core/legacy Smiths business might be the cash-cow but the sector is in secular decline (as a self-confessed owner of Reach (LON:RCH) shares believe me I know).

The principal reason for buying Tufnells (possible synergies with Smiths) may have effectively been written off (without researching it properly yet - I suspect that is the main part of the £46m write off of goodwill); but it is a business with growth prospects to balance the declining Smiths business.

In fact as a slight side-track I think that "proper" logistics businesses may get a bit of a Brexit Bonus when compared with businesses that have simply created a network of "(wo)man and van" operators - many of whom from personal experience are Eastern European. That is not intended to be overly political, but I think it is important to understand that "Freedom of movement of labour" (not people)  has reduced costs and margins in some sectors.

Anyway to "un-digress" Tuffnells made a loss of £5m vs a previous year profit of £12m - I do not consider it to be valueless.

My interpretation of Tufnells is that Connect (LON:CNCT) bought a leading logistics company that they intended to integrate with Smiths and deliver some substantial synergies.

However, during this integration they discovered that Tufnells was actually just a collection of largely autonomous depots that just happened to sport the same logo. It is a business model that clearly worked for Tufnells in the past, but the assumption that it was a uniform business was a disaster.

My view is that the previously envisioned synergies between Smiths and Tufnells may still be achieved in due course but that Tufnells needs first to be "unified".

So when Graham suggests that Tufnells will be a "distracting recovery" I disagree . Connect (LON:CNCT) has now re-organised and essentially owns two (in the short term) unrelated businesses  - Smiths & Tufnells

In due course there may still be achievable synergies here.

(Incidentally, for those wondering why I haven't explicitly  mentioned Dawson Media Direct [DMD] it is simply because I regard them as effectively already part of Smiths.]

No position in Connect (LON:CNCT) at this time, but a likely buyer in the near future.



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peterg 7th Nov '18 32 of 33

For anyone interested in Connect the results presentation is well worth listening to:-
(hat tip to rhomboid for highlighting it elsewhere)

I agree with Tony that the cash flow is striking, and any real sign of a turnaround at Tufnells would be significantly positive. It won't happen overnight, and they are not pretending otherwise, but I don't see it as a write off - and there's a fair bit of healthy kitchen sinking going on here.

I bought in (too soon) earlier in the year after things started unravelling. However, I have no intention to sell where we are now, and I'll be keeping an eye open for a possible time to increase as things develop.

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WarrantStar 8th Nov '18 33 of 33

Hi Graham
Please could you expand on your statement that you take no interest in companies which grow by debt & acquisition? Why don't you? Some acquirers can be good at selecting their acquisitions and do not overpay. Judges Scientific (LON:JDG) comes to mind as a company which has been good at selecting companies to acquire.

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 Are LON:VCP'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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