Small Cap Value Report (Tue 8 Jan 2019) - JOUL, FOOT, ACRL, STAF, Missguided

8th Jan '19 by Paul Scott

21 comments 10825 reads

Good morning, it's Paul here.

Please see the header above for the stocks I intend covering today.

There's a nice recovery underway in decent quality retailer shares at the moment. The emerging trend seems to be that the better retailers (e.g. Next (LON:NXT) ) recouped the sales dip in Nov 2018, in Dec 2018. Although it's once again eCommerce sales which proved key - growth online offsetting the drop in physical store sales, for Next.

Even shares in poor quality retailers seem to be seeing some buying interest, given that share prices have already factored in Armageddon. So anything not too bad, could be seen as positive. Maybe. Who knows, sentiment can turn on a dime at the moment. These are certainly difficult, but rather exciting markets.

To summarise my current thinking, the only retail shares that interest me, should ideally have some combination of the following characteristics;

Niche or differentiated & desirable products (not re-selling generic, or third party products)
High proportion (over 30%, preferably 50%+) of sales online
Sound finances
Short leases on physical stores
Low valuation

A lot of smaller, weaker, retailers are likely to go bust in 2019. Therefore there will be more market share available for the survivors. Plus rents are likely to continue falling considerably, on lease renewals. Hence why this sector, whilst a minefield, is very interesting to me. I focus on this sector because I understand it far better than any other sector, and it usually pays to stick to what you know - as the chance of success is greater.

I seem to have writer's block this morning, but will see if I can get into my stride now.

Joules (LON:JOUL)

Share price: 255p (up 4.3% today, at 11:18)
No. shares: 87.8m
Market cap: £223.9m

Christmas trading update

Joules, the premium British lifestyle brand, today updates on the Christmas trading performance of its retail business for the seven-week period to 6 January 2019 (the "Period").

Checking back, I wrote positively about JOUL here on 5 Dec 2018, thinking it looked good value at 207p. It's up 23% in the month since then - pity I didn't back my judgement with a purchase, but such is life.

Whoever writes the trading updates for Joules should probably be reassigned to other…

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Howard Adams

8th Jan '19

Hi

A couple of product/dservice developments which might interest some.

Codemasters Group (LON:CDM) portion from RSN.
Codemasters (AIM: CDM), the award winning British video game developer and publisher specialising in high quality racing games, today announces that it has entered into a joint development agreement (the "Agreement") with NetEase, Inc. (NASDAQ: NTES) ("NetEase"), one of China's leading internet and online game services providers, to develop a new mobile game (the "Game") for the global market.

WANdisco (LON:WAND) portion from RSN.
WANdisco (LSE: WAND), the LiveData company, has launched a new joint engineered solution with IBM to support relational database technology for the first time, significantly expanding the Group's addressable market.

With reference to gaming sector. I note Frontier Developments (LON:FDEV) up today and yesterday.

Also US NVIDIA chip maker going into gaming chips.
https://www.thestreet.com/investing/nvidia-unveils-new-products-targeting-notebook-buyers-and-cost-sensitive-gamers-14825415

(I hold v.small amounts Codemasters Group (LON:CDM), WANdisco (LON:WAND), £FDEV)

Regards
Howard

MrContrarian

My morning smallcap tweet: Accrol bogs down.

Accrol Group (LON:ACRL), Sigma Capital (LON:SGM), Footasylum (LON:FOOT)

Accrol Group (ACRL) guides FY adj EBITDA only £1m if weak £ and high tissue prices continue. Guides FY rev up 8% to £126m, broadly in line with market forecasts - I have £128.6m. "FY20 results will include the full annualised benefit of the structural cost savings achieved in FY19."
Sigma Capital Group (SGM) guides FY pre-tax profit up 205%, slightly ahead of market forecasts.
Footasylum (FOOT) guides FY adj EBITDA towards the lower end of analyst forecasts due to 'higher than expected levels of promotional and clearance activity'. Plans to cuts costs.

pippasfan

Hi Paul
Re Joules, you have commented in the past about their clothing range being nothing special, and a bit pricey. Having bought many of their clothes, for me and partner, I can vouch for the quality of their goods. Regular customers of Joules, will buy, because their clothes will still be wearable in years to come. When you have family members who hate shopping, and only ever wear the same shirts, Joules is a god send.

cafcash49

As a holder of Wandisco (WAND) I am excited by today's announcement of Product launch with IBM. Their relationship with IBM seems to be strengthening. Will IBM take them over? I have doubled my holding first thing this morning. As always this is not advice DYOR

rmillaree

Staffline (LON:STAF)

A bit of a bombshell trading update from Staffline this morning, trading inline with expectations however exceptional costs for the year will be £20 mill and debt up to £63 mill - so shareprice down nearly 10% (albeit clawing back). On a more positive note they expect no exceptionals 2019.

Is this a bombshell news or not ? i don't really know - they had 4.5 mill exceptionals H1 and it was well flagged up there were issues with the Work program - perhaps there is an element of Kitchen sinking here that will help the 2019 expectations being met on a clean basis - but i have to view it as at least £10 mill down the swanny with £10 mill extra debt to match - a fairly decent chunk of this years profits.

Debt was 37 mill at 30/6/18 and 32 mill at 31/12/17 - thats a big jump but there was acquisitions in H2 and it could be that the Work program cashflow positive next year who knows - they haven't specifically mentioned that debt will drop down quickly in the new year so they obviously have work to do in this regard. They are expecting 32 mill net profit this year(2019) so debt is very manageable but one of the attractions of this share was the reasonably modest debt level - i guess they will say profit has gone from 18 mill in 2017 to expected 32 mill in 2019 - so that has to be funded somehow.

My main hope if that the expectations for 2019 remain reasonably intact as without the future earnings growth this share would be much less attractive - its all to easy to look at nice rosy forecasts at the start of the year and think the company is going great guns.

Hi

Sopheon (LON:SPE) adding to its partnering links. Excerpt from RNS today (I hold a small holding).

Sopheon, the international provider of software, expertise, and best practices for enterprise innovation management solutions, announces that it is partnering with global confectioner The Hershey Company (NYSE:HSY) to support digital transformation of Hershey's product innovation portfolios.

Regards
Howard

JohnEustace

I hate buying clothes that end up in the bin after a few wears. It stopped me buying in M&S when their quality declined. The Joules menswear that I have seen is more robust.

I would require the rag trade to put on the label the number of washes that their clothes will last for so we can calculate a cost per wear. It might help resist the environmental impact of disposable fashion.

I have seen corporate clothing, uniforms and so on, specified that way so it's perfectly possible to do.

jombaston

Staffline (LON:STAF)

rmillaree,

I agree that was a £20m bombshell from Staffline. Hopefully, that is kitchen-sinking but I don't believe we have been given enough information to judge the company's performance. There is no profit guidance and since we were never told the cost of last year's acquisitions (except for Learndirect which was a nominal sum) we can't even judge the cash generation.

'Excluding amortisation charges on intangible assets arising on business combinations and non-cash charges for share-based payment costs, total exceptional costs will be GBP20 million in 2018, principally due to the aforementioned PeoplePlus transformation'

I think this actually means total exceptional costs (including amortisation, share-payments etc) will be more than £20m.

So, on the one hand, the 'underlying' business is performing well but, on the other hand, there was very little profit to be had in 2018!

Something for the bears and the bulls, but just as well the market seems quite perky today.

jombaston

Staffline (LON:STAF)

Yes - i think you are right that the very unexceptional exceptionals will likely be more than 20 mill

There is no profit guidance

I think they confirmed that profits ignoring the "elephant that is the exceptionals" are in line as they quoted the following.

Per todays update

Staffline,is pleased to report that trading for the financial year ended 31 December 2018 is expected to be in line with market expectations.

I guess its pretty to easy to hit targets when so much can end up in exceptionals though - lets hope when they do 200p eps that is not pre 150p exceptionals.

Zipmanpeter

Re: "to put on the label the number of washes that their clothes will last" - Love it!

Brilliantly simple idea that instantly shifts the discussion from price (BooHoo) towards quality and value for money. Should be a part of the quality players marketing communication material at least.

Would no doubt be resisted as impossible to measure and/or open to gaming by cheats and would no doubt lead to some strange effects (polester vs cotton anyone?) - but this is the sort of thing that govt or well designed regulatory schemes can help with in the way. Fridges are now required to give energy ratings.

The environmental benefits would be enormous plus there would likely be positive balance of payment/substitution effects for the UK.

barnetpeter

Foot....bought more today. Basket case stock down 90 per cent in a year but this seems to me a fair entry price for newer holders like me. I thought like PS that the statement could be really dire; but there are some highlights such as

"Online continues to perform strongly, up 28% to £36.0m".

So after a heavy fall I think all the gloom could be firmly in the price.

dgold

"Maybe performance might improve in the future, who knows? Do I want to punt on that happening? No."

Perfectly put - this and similar comments in the past from Paul have been extremely educational and the best advice possible, saving me from many such value traps, thanks very much, and keep going!

I agree John, its also worthy of note about Joules. I have a relative who has a farm on the Falkland Is, and buys his clothes from their shop in Leics. He says they stand up well in their long hard winters. Its what alerted me to them, then I searched, found out they were listed, and bingo

DJCP

Paul,

I note you have MissGuided in your header, and I'm sure we readers can near-guess what your opinion/analysis will be along the lines of ! lol ... Perhaps they should have read the SCVR to see that B&M retailing is (generally) on the decline !

On a similar vein, I've just read:
US retail giant Sears seeks liquidation
https://www.bbc.co.uk/news/business-46797097

One comment made was :
"Its recent journey to this point has been characterised by incredibly poor strategic decisions, chronic underinvestment and continuous financial machinations designed to keep the company afloat.
All of this impacted trading, which has remained dire, making Sears more like a patient in a coma than a fully functioning retailer."

Richard Goodwin

Within the welfare to work sector Staffline (LON:STAF) has a reputation as a spreadsheet driven organisation. It is an industry which wants to do good and they are losing good staff as a result.

Richard Goodwin

ref Staffline (LON:STAF)

Do you know anything about the new prison work - is this likely to be less risky than the welfare to work?

I can't imagine anything worse than welfare for work where a high % of individuals probably have no interest in doing their bit and presumably they were paid on results which was always going to be a challenging situation.

i am hoping with the prison work its more of a go in do your mechanical teaching bit and get paid on a simple basis for this basic service provided - they should at least have a captive audience :) here.

It seems to me this work should be simpler but i am just making this assumption without any facts to back it up.

sharesurfer

I cottoned onto Joules (pardon the pun )from my wife (who knows nothing and cares even less about investing). She said the clothes, while expensive, were very good quality. Seemed interesting as a smaller cap (majority of my stocks) so I bought. Just goes to show that some of your best tips are likely to come from people and things you know about. You just have to listen :-)

Beginner

The Staffline (LON:STAF) website says that 91% of its teaching staff were 'graded 'Good' or better'. 'Good' is the lowest ranking that does not necessitate remedial action. The situation in my local gaol is that the educational provision was provided by the local Tech, but was then put out to tender. An agency got the contract and offered to re-employ the old staff, but under reduced conditions. They left and were replaced by a never-ending stream of under qualified and desperate individuals. The place is a mess; but the agency is still picking up its cheques and will continue to do so. Make of that what you will. Prisons are managed to a budget, and targets regarding re-offending etc are managed to fit the budget.

ezlifeme

9th Jan '19

The opposite is true as well -
"You know it's time to get out of the market when the shoe shine boy gives you tips"
Joe Kennedy, Winter 1928

Jenny Williamson

10th Jan '19

Really interested to read your commments on Missguided. My 20 year old student daughter cited Boohoo, Nasty Gal and PLT (she was shocked and impressed they were all the same company) as well as Missguided as the go to brands for young women. So I was quite surprised to hear Missguided doing so badly. I’ve said here before I would sell up if Boohoo (LON:BOO) founders stepped down. That blend of creativity, a deep understanding of your market and business savvy seems especially important in fashion. Angela Aherne was another great example at £BRBY

Small Cap Value Report (Tue 8 Jan 2019) - JOUL, FOOT, ACRL, STAF, Missguided

Joules (LON:JOUL)

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Paul Scott

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