Small Cap Value Report (Wed 1 Nov 2017) - NXT, BEG, LPA, ZTF

Wednesday, Nov 01 2017 by

Good (Tuesday) evening, Paul here. This is a placeholder article for Weds morning's RNSs, so that readers can post your comments in advance of me writing the main report. See you in the morning! Best wishes, Paul.

Good morning! Paul here. I'm a bit pushed for time this morning, as I have an investor lunch shortly. So I'll work through as many stocks in the header as possible, and then finish off any stragglers this evening.

Next (LON:NXT)

(at the time of writing, I hold a long position in this share)

Q3 trading update - not a small cap, I know! However, traditionally I report on this company's updates, as they're so full of useful information, and have read-across for the general retail sector.

The continuing trend for Next is that its shops are struggling, but its Directory business (a lot of which is online now) is doing really well;


Full year (y/e 31 Jan 2018) profit guidance remains unchanged, but the lower & upper ranges have both been tightened by £5m.

EPS forecast is now in the range of -10.0% to -3.5% versus last year, little changed from previous guidance.

This is probably the most interesting graphic, showing a sharp recent slowdown in sales


No doubt some people will want to blame this on Brexit. However, it's actually due to the weather;

It can be seen that sales performance has remained extremely volatile and is highly dependent on the seasonality of the weather.  In August and September sales were significantly up on last year, as cooler temperatures improved sales of warmer weight stock.  The change in sales trend came at precisely the same time UK temperatures became warmer than last year

Normally I scoff at retailers blaming the weather. However, in this case, Next has a well-deserved reputation for being absolutely straight with investors. Next tends to tell it like it is, hence why its updates are so worthwhile to follow.

A friend (former fashion retail FD) flagged to me yesterday that John Lewis's weekly sales data showed a sharp slowdown in recent weeks. So he correctly forecast that Next would likely show a similar recent deterioration in sales. I owe…

Unlock this article instantly by logging into your account

Don’t have an account? Register for free and we’ll get out your way


As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested. ?>

Do you like this Post?
70 thumbs up
0 thumbs down
Share this post with friends

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 »

LSE Price
Mkt Cap (£m)
P/E (fwd)
Yield (fwd)

Begbies Traynor Group plc is a business recovery and property services consultancy. The Company's segments include insolvency and restructuring, and property. It provides services from a network of the United Kingdom locations through two operating divisions: Begbies Traynor and Eddisons. Begbies Traynor is an independent business recovery practice that handles corporate appointments, serving the mid-market and smaller companies. It provides insolvency, restructuring and consultancy services to businesses, their professional advisors and financial institutions. Eddisons is a national firm of chartered surveyors, delivering transactional and advisory services to owners and occupiers of commercial property, investors and financial institutions. It provides professional services, such as business rescue options, advisory options, forensic accounting and investigations, corporate and commercial finance, personal insolvency solutions and services to banking, legal and accounting sectors. more »

LSE Price
Mkt Cap (£m)
P/E (fwd)
Yield (fwd)

Zotefoams plc is a United Kingdom-based cellular material technology company. The Company is engaged in the manufacture and sale of cross-linked block foams. The Company's segments include Polyolefins, High-Performance Products (HPP) and MuCell Extrusion LLC (MEL). Polyolefins foams are made from olefinic homopolymer and copolymer resin. HPP foams include ZOTEK F foams and T-Tubes insulation, made from polyvinylidene fluoride (PVDF) fluoropolymer. Other products include foams made from polyamide (nylon) and PEBA. MEL licenses microcellular foam technology and sells related machinery. The Company offers a range of categories of products, such as AZOTE, including PLASTAZOTE, EVAZOTE and SUPAZOTE; ZOTEK, including ZOTEK F, ZOTEK N and ZOTEK PEBA, and T-FIT. Its products are used in a range of markets, including sports and leisure, packaging, transport, medical, Industrial, building and medical other construction, and other. more »

LSE Price
Mkt Cap (£m)
P/E (fwd)
Yield (fwd)

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

38 Comments on this Article show/hide all

bobo 1st Nov '17 19 of 38

NXT down turn blamed on the weather, pull the other one, it is usual last straw retailers grasp at and it either too hot or too cold. Debt mountain of consumers is growing and they are cutting back in order to spend in December, cause that is what the kids want. Interest rates are going up guys, accept it

I'd go with Paul's other advice, "retail clothes, it's tough"

| Link | Share | 1 reply
JakNife 1st Nov '17 20 of 38

The market is pricing in a 90%+ probability for tomorrow's rate hike. But beyond that there's less certainty. The market is also pricing in a possible rate hike next May/June but there's no consensus that increase is needed. Regardless, that's the only rate hike that the market is currently pricing in for the whole of 2018.

| Link | Share | 1 reply
Christoph 1st Nov '17 21 of 38

Hi Paul. It would be interesting to get an insight into your portfolio structure. Some of the investments that you have made in BMUS are quite high risk. Do you offset this with less volatile (and higher liquidity) investments in your personal portfolio (are you more of a value investor at heart as suggested by your Next holding)? Do you stick to some kind of portfolio structure/ weighting rules?

| Link | Share
Emperor 1st Nov '17 22 of 38

In reply to post #235203

Personally I'd take £BEG's commentary with a pinch of salt. Looks like somewhat overblown hyperbole to me. It's about time a number of zombie companies went to the wall - creative destruction and all that. With high levels of employment and inflation trending up a small rise in interest rates might help achieve this.

Consumer credit rise needs to slow but unlikely to be a bubble bursting. Begbies have been waiting for a downturn for 7 years. I think they'll be waiting a little longer - though of course I could be wrong.

| Link | Share
purpleski 1st Nov '17 23 of 38

Hi Paul

I always find your comments on the High Street and the likes of Next (LON:NXT) really interesting. I am however much mopre pessimistic on the "high street" and would imagine, it to all intents and purposes, not existing in the medium term outside of, perhaps, major shopping destinations, Oxford Street, Knightsbridge etc (sorry I an London centric). We have had video (Blockbuster), music (HMV), books (Kindle will win in the long term IMO), sotware/games, newspapers, magazines, cinema (the decline in cinema visits in the US is staggering). I just think that the standard high street is next (no oun intended).

The likes of Next (LON:NXT) might be able to transform to a largely internet based business but can it deliver the same volumes and profits? I for one certainly can not say.

I speak as somebody (who actually likes shopping) who can not really remember the last time he made a purchase offline excepting the weekly grocery shop. Online (mainly £AMZN) is just too easy. So I would definately not be long Next (LON:NXT) Debenhams (LON:DEB) Marks and Spencer (LON:MKS) but that is what makes a market!

Best wishes.

| Link | Share
LeoInvestorUK 1st Nov '17 24 of 38

Regarding falling high street rents, this is indeed a key reason for buying retail at the moment, be it Shoe Zone (LON:SHOE) and Next (LON:NXT), but there is still competition for high street space. In my city a large amount of both obsolete retail and office space has been converted (as Paul said) to residential (mostly for students), but also to leisure such as restaurants and gyms. City / town centres are currently finding a new equilibrium driven by the internet, relaxed planning rules for residential conversion and a continuing trend towards city living. It is not entirely clear where this will leave values in the medium term.

Blog: LeoInvestorUK
| Link | Share
Roland Head 1st Nov '17 25 of 38

In reply to post #235203

The profit made by Next (LON:NXT) from credit customers is no left-wing rumour! It's broken out in the firm's results, or at least it was, until the FY17 results, when the breakdown of directory profits disappeared mysteriously...

Here's the last such breakdown I've been able to find, from 1H17:


Interest income is £105m for the half year. Given that full-year operating profit in 2016/17 was £827m, it seems fair to suggest that interest income from credit customers was 25%-30% of the group's operating profit.

What's concerning me (as a shareholder) is why the firm has stopped breaking out this info. What is management trying to hide? Falling interest income or falling Directory sales? Or both? 

We should be told....



Disclosure: I own shares of Next. 

| Link | Share | 1 reply
FREng 1st Nov '17 26 of 38

In reply to post #235138

Thanks for the update. It's very interesting (and I have found it profitable) to understand the reasoning behind your trading.


| Link | Share
FREng 1st Nov '17 27 of 38

In reply to post #235218


Have you calculated that from the gilt market, or in some other way?

| Link | Share | 2 replies
Gromley 1st Nov '17 28 of 38

What an interesting find Zotefoams (LON:ZTF) looks.

Thanks largely to a few mentions around these parts, I have recently read (and am now re-reading) Mark Minervini’s book.

I have to say it has been a somewhat "emotionally challenging" read, but as part of my recent focus has been to resist my weakness to buy too soon, the methods a least chime in part.

The old me was very much : “What a bargain I must buy it now before the market wakes up to it.”

Minervini is more : “What a bargain [very different definition], I should think about buying once the market clearly starts to wake up to it”.

Anyway the link here is that Zotefoams (LON:ZTF) looks to me as though it could have the characteristics of a Minervini “superstock” (in fairness I am probably about 100+ hours short in my research to really make that claim).
It has a recent strong progression in both revenues and earnings :

H1 2017 Revenue (+22% ,+ 14% constant currency) EPS + 22%
H2 2016 Revenue (+11%) EPS +34%
H1 2016 Revenue (+2%) EPS +5%
(EPS pre-exceptionals)

It has a good trading statement (“earnings surprise”) confirming ongoing progress.

Certainly I would agree that it would be useful to know what the “market expectations” were and one can perhaps quibble as to whether (profits) being at the “top end of expectations” is really “a beat” but it certainly puts it above the average/median expectation and I think that today’s market reaction qualifies it as an “earning surprise.”

One could also perhaps quibble as to whether revenues being “above” whilst profits are only “at the top end” raises any question marks.

And then we appear to have (in my reading) a pivot point breakout from a strong base formation on good volume. Readers of Minervini will be familiar with charts like this :


I’ve just got a slight nagging doubt on the base that some of the down days were on relatively high volume; I’m not totally sure of the implications of that? Possibly an indication of more volatility than would be optimal.

Anyway as the chart implies I’ve bought some earlier today, and I will likely be buying more if the price continues to go up. (actually it’s not quite as simple as that, but I couldn’t resist making such an outrageous statement that would have been unthinkable for me a year ago).

This all probably reads a bit “rampy”, so some important qualifications.

  1. Always DYOR
  2. This is my novice interpretation of the Minervini approach so flaws are clearly possible. (In fact it would be great to read views from anyone that does follow the Minervini method).
  3.  I think Minervini himself infers that his hit rate of finding winners is only around 50%. (It is his risk management & timeframes that deliver his super profits).

Edit : I just noticed the price ticked up further whilst I was writing that, so that last candlestick is too low!

| Link | Share
Trident 1st Nov '17 29 of 38


Very interesting to see that breakdown. It looks like credits accounts were already consistently in decline. I therefore suspect interest income may also have been declining. Omitting the analysis does tend to imply the management would rather not draw attention to it, possibly for fear of signalling online and bricks and mortar declines?

| Link | Share
paraic84 1st Nov '17 30 of 38

In reply to post #235253

Thanks Roland, this is really helpful as I was struggling to find the data myself (searching for the wrong term in the search box). It confirms my slight concern that profits could be vulnerable in any credit bubble and I also think it's only a matter of time before there is some kind of regulatory action by the Government.

| Link | Share | 1 reply
Funderstruck 1st Nov '17 31 of 38

In reply to post #235138

Paul; many thanks for covering WEY & the above links, full marks for finding the Student Link , an excellent reference even if she does get a small 'bung' for doing it ; a very self assured confident & charming young lady, a perfect testimony. However still more work to do to determine just how strong the structure is & the strength of the shoestring.

| Link | Share
JakNife 1st Nov '17 32 of 38

In reply to post #235273


"Have you calculated that from the gilt market, or in some other way?"

I work for an investment bank. I asked our sterling desk yesterday for their view on the sterling market and that's word for word what he said, absent his comments about Brexit, the UK economy and the direction of equity markets which were more opinion than fact!

FWIW one-month deposits have been attracting a 21bp interest rate all year but all of a sudden yesterday we got 43bps for a one month deposit, hence what prompted the discussion.


| Link | Share | 1 reply
Paul Scott 1st Nov '17 33 of 38

In reply to post #235303

Hi paraic84 & Roland,

I think Next (LON:NXT) has about 2m active credit accounts - can't remember where that came from, but it's stuck in my memory. The last Annual Report said this about credit accounts;


I suppose, thinking it through, it's likely that fewer people would now want a Next credit account on comparatively high interest. They're more likely to pay instead using a much cheaper bank credit card.

So actually, cheap & easy availability of credit from banks is likely to have hurt Next's profits from offering credit in the last few years.

Therefore, if we do have another credit crunch, and banks withdraw or restrict consumer credit, then this surely creates an opportunity for Next? Next offers credit using its own resources (it has a large, internally funded debtor book), and it can offer credit on whatever terms it wants. So if banks stop offering credit so easily, this would help Next plug the gap & increase its profits.

Jeremy Grime at FinnCap recently flagged up the risk that Next may not be doing proper checks on customers before offering credit. There's maybe some mis-selling risk too, and other regulatory risk. Although given how small the customer credit balances are, it's difficult to see regulators getting over-excited about this.

Regards, Paul.

| Link | Share
Paul Scott 1st Nov '17 34 of 38

In reply to post #235178

Hi JakNife,

Is the "RBG" in the title by accident?

I was rushing this morning, and intended writing something about press comment over the weekend that Revolution Bars (LON:RBG) shareholders are warming to a merger deal with Deltic.

Also there is a new broker note out today, saying that we should anticipate exceptional costs relating to the failed Stonegate deal & pay-off for the CEO of about £2.5m - which seems excessive to me. Probably a good thing the CEO has gone. The broker also lowered EBITDA forecasts a little, but raised EPS forecasts, due to lower depreciation & tax charges.

Regards, Paul.

| Link | Share
Paul Scott 1st Nov '17 35 of 38

In reply to post #235208

Bobo said:

NXT down turn blamed on the weather, pull the other one, it is usual last straw retailers grasp at and it either too hot or too cold. Debt mountain of consumers is growing and they are cutting back in order to spend in December, cause that is what the kids want. Interest rates are going up guys, accept it

I'd go with Paul's other advice, "retail clothes, it's tough"

Normally, I would agree with you.

However, with Next (LON:NXT) - they tell it like it is. Hence why I focus on their quarterly updates.

Also, note that the John Lewis updates confirm what NXT say.

Be sceptical with companies that BS. But Next don't BS - quite the opposite, so we should sit up & take notice of what they say, because it's historically been proven to be true, and in fact, often too pessimistic.

Regards, Paul.

| Link | Share
Paul Scott 1st Nov '17 36 of 38


Points noted re Zotefoams (LON:ZTF) - I'll check out the product range & describe it more accurately next time.
Thanks for pulling me up on this - helpful. I want the SCVRs to be as accurate as possible, so it's very helpful when readers point out anything that's not quite right.

Cheers, Paul.

| Link | Share
cig 2nd Nov '17 37 of 38

In reply to post #235273

You can infer implied probabilities ("the market view") of future rate moves by looking at derivative prices (options and the term structure of interest rate futures), e.g. there:

| Link | Share
FREng 2nd Nov '17 38 of 38

In reply to post #235323

Many thanks for the explanation - that's very helpful.

| Link | Share

Please subscribe to submit a comment

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

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 »


Stock Picking Tutorial Centre

Let’s get you setup so you get the most out of our service
Done, Let's add some stocks
Brilliant - You've created a folio! Now let's add some stocks to it.

  • Apple (AAPL)

  • Shell (RDSA)

  • Twitter (TWTR)

  • Volkswagon AG (VOK)

  • McDonalds (MCD)

  • Vodafone (VOD)

  • Barratt Homes (BDEV)

  • Microsoft (MSFT)

  • Tesco (TSCO)
Save and show me my analysis