Small Cap Value Report (Tue 7 Feb 2017) - NETD, DX., SDY, ENTU, HRN, AMO, WGB

Tuesday, Feb 07 2017 by

Good evening.

Sorry I'm late today - was up at 5am, had done all my emails & Tweets, and was raring to go when the RNS started chucking out announcements at 7am, but within an hour was shivvering & coughing with a bug, so had to go back to bed.

Anyway, we don't like gaps in the sequence, so I'll catch up now.

NetDimensions Holdings (LON:NETD) - (at the time of writing, I hold a long position in this share) - a friend has pointed out this video with the CEO of Learning Technologies (LON:LTG) . In it he emphatically states that the Placing to raise the cash necessary to buy NETD has been done. Therefore any worries I had about whether it could raise the necessary funding seem to have been satisfied.

So it looks a done deal. I've not sold my shares yet, as a 5p discount to the 100p takeover price is too large, so I'll sit tight until the discount is only say 1p.

DX (Group) (LON:DX.)

Share price: 6.95p (down 61.4% today)
No. shares: 200.5m
Market cap: £13.9m

Trading update (profit warning) - this is the latest in a series of dire updates from this mail & parcels business. Key points today;

  • Challenging conditions continuing
  • Pressure on pricing
  • Higher margin business failed to materialise
  • Fixed cost nature of courier business is hurting profitability
  • Problems integrating 5 sites into 1

On a more positive note,

  • the lower margin logistics business has been winning new work, and
  • "material new contracts are now being implemented and the Company's pipeline of new business opportunities is robust"

Put this all together then, and it's a nasty profits warning:

it now anticipates that profits for the year will be significantly below current market forecasts, with net debt consequently higher than expected.

Forget dividends too, probably forever;

...It has also taken the decision not to pay any dividends for the foreseeable future

A full review of the business is underway:

...and has commenced a wide-ranging review of the Company's operations with a view to driving revenues and improving its financial performance.

What's taken management so long? It's been obvious for some time that the business model here was completely broken. The reason is simple - a high fixed cost base, and declining customer revenues.

The core DX Exchange…

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NetDimensions (Holdings) Limited is an investment holding company. The Company is principally engaged in licensing of computer software and the provision of related services. It provides learning and performance management solutions to help companies, government agencies and other organizations manage productivity. Its segments include North America, Europe, Middle East and Africa (EMEA), Asia Pacific and Rest of the World. It offers solutions, including Enterprise Solutions, which include NetDimensions Talent Suite that offers industry solutions for mobile workforce learning and performance support; Content Solutions, which include NetDimensions Interactive business unit that offers custom e-Learning, course libraries, course conversion, consulting, gamification, mobile content/ applications and learning portals, and Professional Services, which include consulting, implementation, support and other professional services so that its clients can deploy its technology solutions. more »

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DX (Group) plc is engaged in the provision of parcels, mail and logistics services in the United Kingdom and Ireland. The Company's segments include parcels and freight, mail and packets, and logistics. The parcels and freight segment offers services, such as DX 1-Man, engaged in the delivery of irregular dimension and weight items; DX Courier, which provides next day parcel services, and DX 2-Man, which offers a business to consumer home delivery solution for heavier and bulkier items. The mail and packets segment comprises services DX Exchange, a business to business (B2B) mail service providing its customers with collection and delivery times; DX Secure, which provides security, and DX Mail, a mail service offering downstream access for smaller volume users. The logistics segment includes the provision of customer-liveried vehicles and uniformed personnel, such as fleet management solutions and integration with customer's business operations. more »

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Speedy Hire Plc is a tools, equipment and plant hire services company. The Company's segments include UK & Ireland Asset Services and International Asset Services. UK & Ireland Asset Services delivers asset management and focuses on relationship management. International Asset Services delivers overseas projects and facilities management contracts by providing a managed site support service. Its geographical segments include UK, Ireland and Other countries. It operates across the construction, infrastructure and industrial markets. Its hire fleet comprises a range of small tools, specialist equipment, and large plant vehicles and machinery. It also retails a range of tools and equipment, as well as safety personal protective equipment (PPE) and site supplies. It also offers various services, such as on-site operative training, test and repair, fuel supply and management, industrial shutdown project management, on-site depots and hire desks. It also offers partnered services. more »

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  Is NetDimensions Holdings fundamentally strong or weak? Find out More »

33 Comments on this Article show/hide all

paduardo 8th Feb 14 of 33

Hi Paul fantastic report as always. I read with interest the article on research tree (naked fund manager) on retail rollouts. I dont know if you ever considered doing a special session maybe at UK investor show or similar on how to crunch the numbers for these chains. You could show the good (cake, rbg, ful) and the bad (craw). I would happily pay to attend as would I am sure a number of your other readers. Thanks Peter

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Ramridge 8th Feb 15 of 33

In reply to Paul Scott, post #12

Hi Paul -
No matter how you look at the numbers, they are really outstanding.
One ratio I look at for growth stocks is the operational gearing measured as (increase in OP/ increase in sales). For Revolution, it stands at 20. To put this in simple english, for every £1 increase in revenues, the Operating Profit increased by £20. (last Prelims 4/10/16).

OCF/ Sales also stands at 12% which is also outstanding. Enough to fund more bar openings.

However there is always the banana skin that we need to watch for, such as a very experienced FD resigning after 6 months in the job. 6 months is long enough for a seasoned FD to find serious stuff he doesn't like.

I am not an investor as this sector is not my patch, but wish I had been October last when a number of analysts, including you, were flagging it.

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Paul Scott 8th Feb 16 of 33

In reply to Ramridge, post #15

Hi Ramridge,

Interesting, thanks.

I think we need to be careful not to imagine reasons why the CFO of RBG has left.
He'd only been in the job 5 months, and from the announcement last year he didn't seem to have any relevant sector experience - his previous roles being for a crane hire business, and a dried fruit/seeds company. How does that make him qualified to do a retail roll-out? (it doesn't, in my view).

I'd tend to keep an open mind, and hope the company appoints a new CFO who has been there & done a retail roll-out before. In this type of business you need much more than someone who can just keep score. Luke Johnson wrote an article about this recently, bemoaning the lack of sector experience on the board of Whitbread.

Regards, Paul.

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pastybap 8th Feb 17 of 33

I like rollouts, but for me the lifespan of concepts such as clubs/cocktail bars is far too short, and subject to extremely fickle trends. They also suck out too much in capital investment as the next "cool" place to be and be seen arrives. I remember in my student days, I always wanted to open my own clubs/chain. Now looking at it from a more experienced eye I will always avoid this industry.

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imranawan 8th Feb 18 of 33

In reply to Ramridge, post #15

Hi Ramridge,

Thanks for your comments about Revolution Bars (LON:RBG), which I hold.

Out of interest, how did you calculate operational gearing for Revolution Bars (LON:RBG) and get to a figure of 20, as I calculated the operational leverage is lower than that based on the prelims. Would you mind outlining the specific figs you used.


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simoan 8th Feb 19 of 33

Hi Paul,

I think the Stockreport for Amino Technologies (LON:AMO) has really been hiding the investment case under a bushel for a while now - it's interesting that all the backward looking QV metrics have been at odds with the Momentum metrics which tells the story. I expect the StockRank will jump up following these results (although they don't seem to have been factored in as of today). I've held for a while and bought more after the last trading update because these results were pretty much in the bag. The management here are excellent IMHO and made two very good acquisitions using the cashpile that have broadened the product range and its appeal to customers. I'm really glad they didn't just hand the cash back to shareholders! :)

Re Walker Greenbank (LON:WGB) I bought a small stake on the recent dip. Again it seems a soundly managed company and they have made what looks to be a very good acquisition in Clarke & Clarke another UK company with a large proportion of export sales. With regard to the flooding, the RNS mentions that the flood defences have been completed, so perhaps you missed it while skim reading.

I must admit I'm struggling to find new positions to open at the moment, everything seems to be so expensive and the cheap stuff is cheap for a reason. So much so, I've started building stakes in Sage (LON:SGE) and Diageo (LON:DGE). So more than ever, I really appreciate your reports.

Have a great break! Si

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Ramridge 8th Feb 20 of 33

In reply to imranawan, post #18

Hi imran -
I tend to use stocko screens to dump the raw data onto a spreadsheet and manipulate values there.

Checking this data against the actual P&L figures for the prelims in oct last, the calcs are as follows

- op leverage = increase in OP profits / increase in sales
= ( (7.3-3.0)/3.0)% / ((119.5-111.8)/111.8)%
= 143/ 6.9
= 20.7
This calculation doesn't take account of any adjustments to OP.

Hope this helps

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imranawan 8th Feb 21 of 33

In reply to Ramridge, post #20

Thanks Ram - much appreciated.

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gus 1065 8th Feb 22 of 33

Re., DX (Group) (LON:DX.) , an RNS just out saying Gatemore have doubled their holding to 22m shares/over 11% of the company.

B***sy call from an investor presumably keeping close track on the business.


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fred9566 8th Feb 23 of 33

Hi Paul - I seem to recall that you said in your last report that you did not know much about what Amino technologies does and it appears that you still don't .Not sure where you are going on holiday next week but if you are in an apartment with access to Sky through a broadband connection I will lay money that Amino are providing the technology to support this .Been in and out of the share for the last couple of years but very much in at the moment -if you read the report you can see that they are providng some very disruptive technology that will continue to grow - tremendous cash generator as well

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fred9566 8th Feb 24 of 33

You mentioned a few days ago that you were half way through the report on 32 Red - did you finish the second half and if so I would appreciate knowing where it is
hope you have a good holiday


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Maddox 8th Feb 25 of 33

Wonderful, I find your candid opinions so refreshing, cheers Maddox

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timarr 8th Feb 26 of 33

In reply to fred9566, post #24

Comment 26 on Monday's report.


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gus 1065 8th Feb 27 of 33

Topical article from Phil Oakley giving a useful framework for analysing a "retail roll out". Focuses on Restaurant (LON:RTN) and Dunelm (LON:DNLM) as roll outs that have maybe run their course and are flagging a bit ( Dunelm (LON:DNLM) had some indifferent interims this morning and is well down again today) and using the analysis for a discussion of Patisserie Holdings (LON:CAKE) . Relevant for considering Revolution Bars (LON:RBG) as well IMO.


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crazycoops 8th Feb 28 of 33

Yes, this is a good article from Phil Oakley. The Naked Fund Manager (via Research Tree) also wrote a good article on retail roll-outs this week which included some comment on Revolution Bars (LON:RBG) and Patisserie Holdings (LON:CAKE)

Blog: Share Knowledge
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TMFMayn 8th Feb 29 of 33

It is interesting to compare RBG and CAKE.

Last year RBG opened 5 sites (and presumably refurbished others) at a cost of £13m. This was funded from net cash flow from operations of £14m. RBG ended the year with 62 sites.

Last year CAKE opened 21 sites (and presumably refurbished others) at a cost of £9m. This was funded from net cash flow from operations of £22m. CAKE ended the year with 184 sites.

Let's assume for the current year that RBG opens another 5 sites and CAKE opens another 21 sites. Estate growth is therefore 8% for RBG and 11% for CAKE.

Even though RBG has the lower estate growth, its accounts suggest most its operating cash flow will once again be spent on capex.

In contrast, CAKE has the higher estate growth, and yet its accounts suggest less than half of its operating cash flow could be spent on capex.

From this admittedly cursory analysis, CAKE's chain clearly enjoys the more attractive roll-out economics.

That may explain the P/E rating differential between the two.

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simoan 11th Feb 30 of 33

I think the Stockreport for Amino Technologies (LON:AMO) has really been hiding the investment case under a bushel for a while now - it's interesting that all the backward looking QV metrics have been at odds with the Momentum metrics which tells the story. I expect the StockRank will jump up following these results (although they don't seem to have been factored in as of today).

Well, it took a few days but the SR has now jumped from mid 40's to 96!!


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gus 1065 31st Mar 31 of 33

Another spin of the wheel this morning accompanying the latest lacklustre DX (Group) (LON:DX.) Interims. They have announced a putative reverse takeover/ merger with the John Menzies distribution division promising significant cost savings from the combined entity.

Appears to be funded through borrowing as opposed to a dilutive equity raise* and the DX (Group) (LON:DX.) shares have been suspended pending further announcements. Although not agreed seems pretty well advanced. Not immediately apparent whether this is an initiative of JM, the current DX board or their recently active/agitating shareholder that has been pushing for strategic change. Possibly a lifeboat for long suffering DX (Group) (LON:DX.) stakeholders in this singularly accident prone company.



* spoke too soon.  Just re read the detail which suggests JM will receive roughly 80% of the to be issued shares in the new entity.  Suggests no new funding requirement of DX shareholders but clearly dilutive

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catalogue 8th May 32 of 33

Amino Technologies (LON:AMO) - I am not good on balance sheets but unable to get a picture I am attempting to decipher what the business is about. Things that jump out are that intangible assets amount to £46m which seems high. (There should be a button on company reports s "remove guff" and they'd take half the time to read). Sales are interesting £38m USA, £12m Latin America and £13m Netherlands. What happened to Booxmedia.oy sales?. Donald McGarva CEO took 63% of the total Directors' compensation - he had better be good! I hope someone with more skill might take a look because it looks like a good opportunity. The new Stockopeda ratings Adventurous, Small Cap, High Flyer seem spot on.

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gus 1065 5th Jun 33 of 33

In reply to gus 1065, post #31

Update RNS from DX (Group) (LON:DX.) this morning on the putative merger with John Menzies distribution arm. Deal still moving ahead on revised terms that appear to be more favourable to DX holders. Importantly, appears to have support of activist investor Gatemore who now hold more than 20% of DX.  No mention of when the ongoing suspension of DX. shares from AIM will be lifted, presumably after a formal agreed deal is announced (or dropped).


Text of RNS:-

5 June 2017

DX (Group) plc

Update on the proposed combination of

DX and John Menzies' Distribution division

Further to the announcement made on 31 March 2017 by DX (Group) plc ("DX") and John Menzies plc ("John Menzies") regarding the potential combination of DX and John Menzies' Distribution division ("Menzies Distribution" and, together with DX, the "Enlarged Group") (the "Transaction"), the boards of DX and John Menzies today announce agreed revised terms of the Transaction.

The boards of DX and John Menzies continue to believe that the combination has strong strategic logic for all stakeholders and that the Transaction, on the agreed revised terms, represents an opportunity to deliver significant value to both companies' shareholders. The boards of DX and John Menzies believe that the combination would benefit the customers of DX and Menzies Distribution through the creation of a logistics and parcel carrier of enhanced scale and capability operating through a 24 hour logistics network across the UK and Ireland. Based on a joint assessment, the boards of DX and John Menzies estimate that the combination would generate cost synergies of around £10 million per annum.

Under the revised terms of the Transaction, it is envisaged that DX would acquire Menzies Distribution for consideration, on a cash and debt free basis, comprising £40 million in cash and the issue of new DX ordinary shares (the "New DX Shares") representing 65% of DX's issued share capital as enlarged by the Transaction. The cash consideration would be satisfied by new borrowings by the Enlarged Group.

On this basis, on completion of the Transaction, current DX shareholders would therefore own, in aggregate, 35% of DX's enlarged issued share capital. It is intended that the New DX Shares would be issued by DX to John Menzies' shareholders pro rata to their holdings of shares in John Menzies at the relevant date such that John Menzies shareholders would own, in aggregate, 60% of DX's enlarged issued share capital and 5% of DX's enlarged issued share capital would be owned directly by John Menzies' pension scheme as retained by John Menzies.

As previously announced, it is proposed that approximately 17% of John Menzies' defined benefit pension scheme would transfer to the Enlarged Group as part of the Transaction. The receipt by John Menzies' pension scheme, as retained by John Menzies, of 5% of DX's enlarged issued share capital is part of the transfer arrangements agreed with the John Menzies pension trustees.

In addition, the boards of DX and John Menzies recognise the importance of a dividend to shareholders of the Enlarged Group. It is intended that the Enlarged Group will reinstate the payment of a regular dividend on completion of the Transaction, taking into account the leverage, earnings growth and investment requirements of the business.

Alongside the Transaction, John Menzies intends to raise gross proceeds of approximately £30 million by way of a conditional cash placing of new John Menzies shares primarily to institutional investors, the proceeds of which would be retained by John Menzies post completion of the Transaction.

The boards of DX and John Menzies believe the proposed Transaction structure enables both DX and John Menzies shareholders to share in the significant potential value created by the combination of DX and Menzies Distribution, whilst increasing substantially the liquidity of DX's ordinary shares and enabling the divestment of Menzies Distribution into a separately quoted company in line with John Menzies' strategy. The boards of DX and John Menzies believe respectively that the Transaction would create strategically focussed companies, each of which would have a strong balance sheet and the financial resources to invest in the future of their respective businesses for the benefit of each company's stakeholders.

In light of the revised terms, GCM Partners II, L.P., acting by its investment manager Gatemore Capital Management LLP ("Gatemore"), which is the beneficial owner of 21.3% of DX's issued share capital, has entered into an irrevocable undertaking with DX, dated 4 June 2017, to vote in favour of the resolutions implementing the Transaction at the general meeting of DX shareholders to be held to approve the Transaction in due course.

The Transaction would be subject, inter alia, to the approvals of both DX and John Menzies shareholders at respective general meetings.

The boards of DX and John Menzies continue to anticipate the Transaction will be completed during the summer of 2017. Discussions are ongoing and there can be no certainty that a transaction will occur.

Bob Holt, Chairman of DX, and Dermot Smurfit, Chairman of John Menzies, said:

"We are pleased to have reached this agreement and believe that the revised terms of the proposed transaction represent an attractive opportunity for all stakeholders of both companies."

A further announcement will be made when appropriate.


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About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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