Small Cap Value Report (Tue 9 Feb 2021) - FCCN, JOUL, TND, D4T4, BRCK

Good morning, it’s Paul here with the SCVR for Tuesday.

Hooray, down votes have been abolished! That gets rid of the negative energy, and bickering hopefully (I'm an optimist!)

Timing - TBC

Agenda -

French Connection (LON:FCCN) - (I hold) - mystery buyer of 25% is disclosed

Joules (LON:JOUL) - (I hold) - Acquisition of Garden Trading

Tandem (LON:TND) - Positive trading update for FY 12/2020

D4t4 Solutions (LON:D4T4) - CFO leaving, and a mini trading update

Brickability (LON:BRCK) - Trading update - raises guidance for FY 03/2021

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French Connection (LON:FCCN)

(I hold)

25p - mkt cap £24m

New 25% shareholder disclosed

The Takeover Panel says on its website that French Connection (LON:FCCN) entered an offer period at 07:00 on 5-Feb-2021, although I'm not sure if holders of 1% or above are meant to disclose that yet. I haven't seen any disclosures as yet. My total position (including a spread bet) is slightly over 1%, so I need to keep an eye on that.

There was a TR-1 standard disclosure at 16:10 yesterday, that the 25% stake sold by Mike Ashley's Frasers (LON:FRAS) has ended up being bought (25.33% of FCCN) by Apinder Singh Ghura of Newcastle.

I've googled this name, and the only things that come up are Directorships, so I went to Companies House and found this person listed as an active Director of 10 companies based in Newcastle and Manchester. I've been through the latest accounts for all of these companies, and list them below in order of largest balance sheet NAV:

• Chan Property Group Ltd - £5.2m NAV
• Chan Commercial Ltd - NAV £2.8m
• Willow View Care Ltd - £985k
• Newport Lane Estates Ltd - NAV £74k
• Northumberland County Developments Ltd - NAV £100

There are 5 more companies which have been incorporated in 2019 or 2020, hence have not yet filed accounts, namely;

• FCMUK Ltd - incorporated Sept 2020 - and clearly bearing a striking resemblance to French Connection's logo "FCUK", so maybe this was set up as a vehicle to get involved with FCCN in some way?
• MIP Holdings Ltd - incorporated Oct 2020 - wholesale & retail of clothing
• Phantom International Ltd - incorporated Feb 2020
• Apparel Sourcing Group - incorporated Sept 2019
• Wraith Holdings International Ltd - incorporated July 2019

Activities of the companies are a mixture of clothing wholesale/retail, property, and a care home.

Conclusion - there's nothing particularly earth-shattering there, it looks like a moderately wealthy individual, involved with a variety of small companies. If anyone finds out anything more about why this individual has bought a 25% stake in French Connection, then please let us know!

What are the shares worth in a takeover situation? They're only worth what someone is willing to pay. That's also assuming that Stephen Marks will be prepared to agree a price for his life's work (he founded the company in 1972 I believe). My view has always been that the brand licensing, and profitable wholesale divisions within FCCN have a decent value. I think an acquirer could also strip out a lot of central costs (which look too high) and maybe ditch the loss-making retail sites using a CVA or pre-pack. There's scope to develop the licensing side of the business too, e.g. a successful deal with DFS shows that the brand has continuing customer appeal. It's also used on spectacles, sunglasses, perfume, handbags, etc. There's plenty of potential there in my view to expand the licensing operation, which made £5.5m revenues last year, and I doubt there would be much costs associated with that, licensing revenue is usually mostly profit.

Time will tell, but I'd be disappointed with less than 50p per share exit price here. There's got to be a fairly high chance that no deal is the outcome, as Marks is notoriously difficult. The finances were shored up last year with a working capital loan from Hilco, and a US Govt-backed loan for its USA operations, so the business is not in any financial distress at the moment. The last interim results were awful though, with a terrible gross margin, indicating heavy discounting. It won't be able to trade at that level of losses indefinitely.

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Joules (LON:JOUL)

(I hold)

160p - mkt cap £173m

Acquisition of Garden Trading

Joules, the premium British lifestyle brand, is pleased to announce that it has acquired The Garden Trading Company Limited ("Garden Trading"), a digitally led retailer of home and garden products inspired by the British countryside and lifestyle trends (the "Acquisition").

This looks a very good fit, of a fast-growing brand that already sells on Joules’ marketplace, Friends of Joules, through its own website, and via c.1,000 stockists.

The figures for the acquired company look good too -

• Revenues £16.8m, FY 11/2020 (for context, JOUL is forecast c.£202m this year)
• Revenue growth of >40% on prior year - excellent
• Profit before tax of £2.0m - a strong profit margin of nearly 12%

Cost of the acquisition -

Cash £4.5m

New Joules shares - 2.83m valued at 159p = £4.5m (with lock-up)

Deferred consideration up to £3.5m (at least £3.0m in cash) - subject to performance targets for FY 11/2021

My opinion - this looks a cracking deal, buying an excellent profitable business for what seems a bargain price.

GTC looks a quality company, and an obviously good fit with Joules, in terms of its brand, products & customers.

GTC is cash generative, and has minimal capex requirement. Management says it’s not about cost synergies, but driving growth, and utilising GTC’s design & sourcing expertise to enhance Joules’ ranges, as well as growing its own sales & profits.

Broker forecasts will be raised, to include profits from GTC in Joules FY 05/2022. It’s expected to be neutral for the few months left of FY 05/2021.

A firm thumbs up from me, this looks an excellent deal.

It took me a few years to get my head around Joules, but it's now in the buy & hold forever section of my portfolio. Key points are that it's selling mostly online now, including its own marketplace for other brands, and has a very distinctive brand & products, not a me-too retailer.

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Tandem (LON:TND)

560p (up 9%, at 09:24) - mkt cap £28m

Trading Update

Tandem Group plc (AIM: TND), designers, developers, distributors and retailers of sports, leisure and mobility equipment, announces a trading update ahead of its annual results for the year ended 31 December 2020 which are due to be announced in March 2021.

• Slow sales over Q3, as previously reported
• Q4 improved (6% up on LY Q4)
• Full year revenue £37.1m
• Gross profit margins strong
• Operating costs down 11%
• Stock availability issues improved towards year end
• Pension scheme - triennial valuation agreed, 5% increase in company contributions (note that increased divis could trigger higher pension payments)

Overall -

Group profit before tax is therefore expected to be materially ahead of the prior year. The strong trading performance also enabled cash generation which helped to strengthen the balance sheet position further.

Outlook - encouraging start to 2021, despite pressures (e.g. covid, travel restrictions, longer lead times, cancelled or deferred product exhibitions).

Current trading - sounds very strong -

Notwithstanding these issues, revenue to the end of January 2021 was approximately 75% ahead of the same period last year with back orders fulfilled as stock was received. Our forward order book across all parts of the Group is also substantially ahead of last year which is encouraging.

Inflationary pressures building - this is something that worries me on a macro level -

The US dollar is currently weaker than previously which is a positive although Far East costs are under great pressure due to material price increases, global demand and the adverse relationship between United States dollar and Chinese renminbi.

Freight costs & disruption - has read-across for lots of companies -

One of the most pressing current issues is with respect to freight where, despite having part of our freight requirement at fixed prices, there has not been enough capacity in the system to fulfil demand, coupled with port congestion and COVID-19 related delays. To ensure supply we are currently being quoted many times the rates we were paying in the Autumn of 2020. Whilst we have continued to import products, in some cases we have chosen not to at this time, although it is unclear when freight rates will begin to reduce to allow this to become commercially viable again.

Diary date - 25 March 2021 for FY 12/2021 results.

My opinion - this announcement is very detailed (I’ve just covered the main points above, see RNS for more). It sounds very good to me - strong trading in 2020, and a positive outlook.

I don’t have any forecasts, so can’t do a valuation on it.

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£d4t4

(I hold)

307p (down 4% at 13:30) - mkt cap £124m

CFO Leaving

D4t4 Solutions Plc (AIM: D4t4, "the Group" or "D4t4"), the AIM-listed data solutions provider, announces today that Chief Financial Officer, Charlie Irvine, has decided to leave the Group to pursue another opportunity outside of the public markets. Charlie will leave following a period of three months' notice and in the interim will remain with the Group to ensure an orderly handover of his responsibilities. A search has been initiated for his replacement and further announcements will be made in due course.

Not ideal. Investors don’t like it when a CFO departs, because sometimes it can be a warning sign that something isn’t right. On the other hand, people change jobs for all sorts of reasons.

It doesn’t sound acrimonious anyway, in that he’s staying on for an orderly handover.

There’s a mini trading update buried in the text also -

"The Group continues to perform well and I look forward to updating shareholders on the Group's progress following the forthcoming year end."

The year end is 31 March 2021. Last year it provided a year end trading update on 8 April, so that’s a good date to add to our diaries for similar reporting this year.

My opinion - I hope this is nothing to worry about, and it’s reassuring that the group performs well. There was an excellent write-up about the company in well-known tip sheet Small Company Share Watch recently, which added useful colour to my understanding of the company.

Its software & services look very interesting, and highly relevant in today’s world. Although the company is still very small, and needs to scale up with more big contract wins.

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Brickability (LON:BRCK)

67p (up 1% at 13:43) - mkt cap £154m

Trading Update

Brickability Group plc ("Brickability" or "the Company" or "the Group"), the leading construction materials distributor, is pleased to provide the following update on trading.

The current financial year is 31 March 2021.

• Strong recovery continued in H2
• Lockdowns since Nov 2020 had “little material effect on trading”
• Rigorous cost control maintained
• Market improving, and housebuilding sector remains fundamentally strong
• No negative impact from Brexit
• Order books healthy & believes that “demand will remain strong”

Guidance -

As a result of the above, the Group now expects an adjusted EBITDA* of at least £16 million for the full year to 31 March 2021.

*Adjusted EBITDA is defined as earnings before interest, tax, depreciation, amortisation, exceptional and acquisition costs.

The statement doesn’t say how that compares with market expectations, which would have been helpful. Although I do like the specific guidance figure given.

Cenkos & Zeus, two of my favourite brokers for research, have covered BRCK before, but I can’t see any updates from either today on Research Tree, which leaves me a bit stuck.

Looking at an old Cenkos note from Nov 2020, it had pencilled in £15m EBITDA, so “at least £16m” today is up about 7%. If I apply the same percentage rise to adj EPS, it goes up to 4.9p for this year. That’s a PER of 13.7 - which looks about right for a building supplies distributor.

My opinion - like so many other shares, this has risen strongly since the vaccine news turned positive last autumn. What is going to propel it higher still? As the 3-year chart shows below, it’s back to pre-covid valuation, which is maybe high enough?

Although looking at consensus forecast for next year, that suggests strong earnings growth to 6.2p. So if that’s achieved, we could be looking at more upside on the current price maybe? I don't have a strong view either way, but good luck if you do take a shine to this particular share.

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