Small Cap Value Report (Wed 1 August 2018) - NXT, CNKS, SOG, HSP, FCA, GETB

Wednesday, Aug 01 2018 by

Good morning!

Today we have:

Next (LON:NXT)

  • Share price: 5596p (-6%)
  • No. of shares: 140 million
  • Market cap: £7,817 million

Trading Statement

(Please note that I currently own NXT shares.)

It's an H1 update from this retailer. The new bit is the middle column:


The sales growth in Q2 is not as good as Q1, although those Q1 numbers were remarkably strong.

The company puts the results in context: it had guided for full price sales for the rest of 2018 to be up around +1%. Therefore, this +2.8% result for Q2 is ahead of guidance.

But, since many of these sales have probably been pulled forward from August, Next is leaving full-year guidance unchanged.

We get a useful chart showing the performance of each week compared to last year - it shows that the first week of heatwave in 2018 saw sales up more than 25% against the same week in 2017.

The end-of-season sale went better than expected, but gains were offset by higher warehousing and distribution costs.

Cash flow & profit guidance: no change. 2018 PBT is still guided to be 1.3% below 2017 PBT, though EPS will be higher thanks to the completed share buyback programme.

My view: Share price weakness today reflects the fact that the company has been so conservative with its full-year forecast, implying that H2 is going to be much weaker than H1.

I'm happy to continue holding. This share fits my pattern of buying into large, leading companies where growth may have stalled in the short-term but where management are highly competent and the balance sheet and cash flows are strong. Next expects to generate £300 million of surplus cash this year and that's after paying ordinary dividends. And crucially, it looks like it will survive the ongoing transition to online sales.

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

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NEXT plc is a United Kingdom-based retailer offering clothing, footwear, accessories and home products. The Company's segments include NEXT Retail, a chain of over 500 stores in the United Kingdom and Eire; NEXT Directory, an online and catalogue shopping business with over four million active customers and international Websites serving approximately 70 countries; NEXT International Retail, with approximately 200 mainly franchised stores; NEXT Sourcing, which designs and sources NEXT branded products; Lipsy, which designs and sells Lipsy branded younger women's fashion products, and Property Management, which holds properties and property leases which are sub-let to other segments and external parties. Lipsy also sells directly through its own stores and Website, to wholesale customers and to franchise partners. The Company's franchise partners operate approximately 180 stores in over 30 countries. more »

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Cenkos Securities plc (Cenkos) is a United Kingdom-based independent institutional securities company. The Company's principal activity is institutional stockbroking. Cenkos provides corporate finance, corporate broking, research and execution securities services to small and mid-cap growth companies, and other companies, across a range of industry sectors, as well as investment funds. The Company offers its clients access to equity finance at various stages of their development. The Company's activities also include institutional equities and market making. It provides technical advice on all forms of corporate transactions, including initial public offerings (IPOs), fundraisings, mergers and acquisitions, disposals, restructurings and tender offers. The Company's subsidiaries include Cenkos Nominee UK Limited, Cenkos Securities (Trustees) Limited and Cenkos Securities Asia Pte Limited. more »

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StatPro Group plc is a United Kingdom-based company engaged in the development, marketing and distribution of software systems and the provision of Web-based portfolio analysis and asset pricing services to the global asset management industry. The Company's segments include Europe, South Africa and Asia Pacific (EMEAA), North America and Central. The Company offers the StatPro Revolution, which is a portfolio analytics service. Its StatPro Revolution is a platform, which allows users to access portfolio performance, attribution, contribution, allocation, risk and compliance analytics. Its StatPro Revolution covers over 3.2million global securities, including equities, fixed income, mutual funds, listed futures contacts, inter-bank deposits and options. Its StatPro Revolution supports various data models, which include holdings-based, market values, pre-calculated weights and returns from StatPro Seven, or pre-calculated weights and returns from other performance systems. more »

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

29 Comments on this Article show/hide all

rmillaree 1st Aug '18 10 of 29

Next (LON:NXT)
I am a bit surprised by the drop today seeing as its pretty much as expected - perhaps bods where expecting the reversal of fortune to continue with another slight upgrade. The one figure that did jump out a little was the lowered increase in the online comparatives - online is presumably the future and i am hoping there was plenty of double digit growth still to come, perhaps the future implied growth is now a bit lower.

One bonus is the share buyback increasing EPS by 4.7% i didn't realise it had that much effect, albeit the increase will likely be mitigated by lower store profits.

Hey ho was tempted to sell 50% the other day (the shareprice has had a decent rise from its lows) and didn't, i guess its back to the bottom draw for these.

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Wimbledonsprinter 1st Aug '18 11 of 29

Graham I agree that Next (LON:NXT) has been a superbly run company but I think it is a bit of an understatement to say that short-term growth has stalled. Top line growth at Next has been only 22% cumulative in the 10 year period to 2018 - which will be a bit less than CPI over the same period. Over the same period PBT has risen 46%, as the company has managed well the transition from bricks and mortar to online.

But what the management has done extremely well is be prudent with the cash generated. Reasonable dividends have been paid and on top of this the share buy-back policy begun in March 2000 has been consistently applied. In the last 10 years 60 million shares have been bought back reducing the share count from 201 million shares (2008). This has led to a 147% increase in EPS over those 10 years.

Share buy-backs often get a bad rap, but when done consistently, as in Next’s case, in a mature business can really generate EPS growth.

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Graham Neary 1st Aug '18 12 of 29

Hi WS, good points re: Next (LON:NXT). Thanks. G

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Graham Neary 1st Aug '18 13 of 29

In reply to post #387179

Hi, nice suggestion, I will consider GetBusy (LON:GETB) for inclusion. G

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grout123 1st Aug '18 14 of 29

Would you also consider Sylvania Platinum (SLP) please ?

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Graham Neary 1st Aug '18 15 of 29

In reply to post #387234

Hi grout, I'm afraid I don't do resource stocks. G

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Julianh 1st Aug '18 16 of 29

Did anyone see this weeks news that the FRC has stopped a 2 year investigation into Grant Thornton over its audit of Globo?
Paul Scott (in this column) had been highlighting Globo as a fraud for almost almost three years before the company collapsed after the company admitted that its accounts had been fabricated.
If Paul could see the ref flags in the information reported in Globo's RNS's surely there would have been enough there to encourage the auditors to do a little bit of verifying:
* do the customers exist (they didn't)
* do the bank balances exist
* does the product work (it didn't)
Aren't auditors required to apply a little common sense to go with all then ticking and bashing of documents provided by the directors? What hope us poor investors when directors can so easily pull the wool over the eyes of somnolent auditors?

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Wimbledonsprinter 1st Aug '18 17 of 29

Julian. Interesting points. I was at a Sharesoc/PWC meeting a month or so ago about the role of auditors and audit committees. There was a lot of nice words spoken about how whistleblowers are encouraged and taken seriously. But when I asked if the auditors / audit committe would ever try to speak directly or indirectly to a short seller on why they were shorting the stock - this seemed beyond the pale. While shorters short for all sorts of reasons (hedging, arbitrage, think stock is simply overvalued), when there is a large short in a share this should be a heads up for the auditors. It cannot be beyond the capabilty of the audit committee to use the company broker to try to discover why people are shorting the stock, without encouraging manipulation. Due to the risks of getting it wrong, shorters are generally highly informed (while obviously not infallible) about the stocks they are shorting.

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matylda 1st Aug '18 18 of 29

Thanks Graham as always, much appreciate the report.

I wonder though, or perhaps I am being a bit think - But why is are the terms "Retail" and "On-line" used these days when the "On-line" side is retail too. Maybe being a bit picky here but when they sell "On-line" it's still...

"the sale of goods to the public in relatively small quantities for use or consumption rather than for resale"

Blog: Briefed Up
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JGG 1st Aug '18 19 of 29

In reply to post #387204

Unless you're in the lottery, it's "bottom drawer".

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sharw 1st Aug '18 20 of 29

In reply to post #387249

Agreed - another company was Redcentric (LON:RCN) which gave a bad warning over accounting irregularities in November 2016. I wrote at the time " me the most disturbing bit of the November bombshell was "The Board also believes that the underlying net debt position at 31 March 2016 was materially higher than as reported". Those a/cs were signed off by PricewaterhouseCoopers who were paid £126k to do so on behalf of the shareholders. Now you might be able to hide a fistful of invoices from the auditor to reduce the 'payables' but I would have thought that net debt was one of the most verifiable figures by checking bank statements. They have some explaining to do. It also adds to the argument that auditors should be changed every so often".

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Trident 1st Aug '18 21 of 29

Auditors at the end of the audit meeting will invariably ask the management to sign a letter of representation. This shoves a lot of the 'risk' of what has been given to the auditor to review back onto the management/company.

They may highlight risks in their annual audit review document, but this is in a sense a basis of recommendation to the management, if indeed they suggest changes because of risk.

If the board don't make changes, the audit can qualify the accounts, or resign.

In many instances they are only in the company for a few weeks, and they usually don't have the insight to second guess lots of detailed information.

It really is for the audit committee to have a bit of backbone, and be more active in the audit overview if they have concerns. Too often, as we have seen with Remuneration Committees, they tend to be nodding donkeys.

Interestingly, in the Fundsmith 2018 AGM, they were asked about company fraud as an investing risk, and what they said was they they sometimes run a Benford formula on figures in report and accounts. This is apparently a mathematical formal which tends to pick up anomalous figures, based on normal distribution statistics.

Don't ask me how this works in relation to a normal set of report and accounts, but made up numbers tend to fall out of normal distribution patterns, apparently.

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shipoffrogs 1st Aug '18 23 of 29

In reply to post #387354

Trident, I don't think you can run Benford numbers on figures in reports and accounts to determine fraud.
The fraudulent figures would sit below those reported in the accounts which would be aggregations of the individual entries in the books. Because they're aggregations I don't think a Benford comparison would identify fraud.
The individual entries though could be benchmarked against the Benford distribution and it is a tool available to the auditors. And the Inland Revenue.

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Andrew L 1st Aug '18 24 of 29

Interesting update on Next (LON:NXT). I understand the investment case here i.e. a cheaply rated online clothing business if you strip out the stores. However, isn't it somewhat hard to get excited about? The market environment is becoming more competitive and Next (LON:NXT) is a somewhat mature and staid brand. The clothes are very good but can they really beat the online only competition?

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hawkipa 1st Aug '18 25 of 29


FWIW on StatPro (LON:SOG)

I looked at the product as a potentially cheaper version of Bloomberg some time ago. It looks to be a generally good tool, however, its not really any better than the similar Bloomberg offering (PORT) and Bloomberg comes with so much more, that for the relative price difference I can't see why any professional wouldn't opt for Bloomberg. I suspect they offer large discounts to get clients in so they may well get cost conscious start ups in but I doubt any major fund manager would need them as most will either use Bloomberg or have better internal portfolio management tools.

Regarding the Delta purchase I can't really understand where they hope it will go. It is really yesterday's news as far as the professional bond market is concerned. By way of background, UBS Credit Delta as it used to be was an amazing tool c2004-2006, which generated huge revenues for UBS trading desks. Essentially, what it did was analyse a credit portfolio and suggest optimising trades for a given set of parameters which could run into literally billions of notional. Clients were offered Credit Delta free as the trading desks made substantial bid/offer from it. This drove a substantial amount of UBS FICC revenues in those years. Most other Investment Banks were incredibly envious of the revenue generating capacity and set about developing rivals or solutions that would at least be alternatives and capture the consequent bond flow. If you fast forward to today, undoubtedly many fixed income managers will still find value in it, but I suspect most won't given that when UBS tried to start charging for it if clients didn't trade on the back of it to a certain level. As a result, most clients just stopped using it.

The other issue is that optimisation more generally of massive fixed income portfolios. It is now a very difficult process as liquidity in the bond markets can't sustain, for example, a £1bn transition trade like it used to. The banks just don't have the balance sheet to warehouse that kind of risk anymore. Therefore, the product has less value than it once did. Also, Barclays has a similar offering that was perceived to be at least as good if not better than Delta. What this means in practice is that why would an FI manager pay a standalone company ie StatPro (LON:SOG) for it when Barclays will offer it largely free in return for the subsequent flow it will prompt. Undoubtedly, MIFID 2 might help Statpro, but I have no doubt that the likes of GS, MS, Citi & JP will have world class offerings that will be heavily subsidised, if not free, for most clients who trade with the secondary desks. Furthermore, a lot of the larger buy side firms took a lot of this kind of work internally by just hiring the boffins who created the code. To that end I see limited possibilities for this purchase.

All in all I have suspicions about its product offering vs the natural opposition and can't see where the substantial growth can come from for such a high rating. Plus if they come up with some particularly impressive the banks/Bloomberg/Reuters have the knowhow to just do it better. I'm probably missing a key moat that they have but I can't see what it is.

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prem14 1st Aug '18 26 of 29

In reply to post #387159

Hi Graham
Which company did you mean in this statement above in your report for Cenkos Securities (LON:CNKS) ? -> " (for example £NUM? it has a £450 million market cap) "

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Graham Neary 1st Aug '18 27 of 29

In reply to post #387394

Numis (LON:NUM)

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jonesj 1st Aug '18 29 of 29

Am at the early stages of inspecting the apparent bargain that is Cenkos. Other than being in a sector with very uneven income, I haven't found much wrong yet. Must be missing something.

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 Are LON:NXT's fundamentals sound as an investment? Find out More »

About Graham Neary

Graham Neary

Full-time investor and independent analyst. Prior to this, I spent seven years in the financial markets as an analyst and institutional fund manager. I'm CFA-qualified, also holding the Investment Management Certificate and the STA Diploma in Technical Analysis.Away from finance, my main interests are recreational poker and everything to do with China, especially Mandarin Chinese. more »


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