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

1st Nov '17 by Paul Scott

38 comments 16192 reads

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…

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gus 1065

1st Nov '17

Not a small cap, but maybe worth a comment in the Next (LON:NXT) quarterly trading statement for general guidance on the state of UK fashion retail.

https://www.investegate.co.uk/next-plc--nxt-/rns/trading-statement/201711010700041815V/

Slightly Delphic commentary due to the perceived volatility of trading making forecasting difficult. They've narrowed the full year forecast range in line with previous estimates and intimated further special dividends to come. Given the generally neutral tone (IMO) the share price reaction today might give an indication of whether Mr Market sees the glass half empty or half full for UK retail.

Gus.

Rusty2

Good morning Paul, A quiet day, only thing that caught my eye was Begbies Traynor (LON:BEG) red flag report about companies in distress, if interest rates do rise seems things will get worse.

MrContrarian

My morning smallcap tweet:

Zotefoams (LON:ZTF), Proxama (LON:PROX), Active Energy (LON:AEG), IMImobile (LON:IMO)

Zotefoams (ZTF) Q3 strong. Sees FY rev ahead of mkt exp, pretax at top end.
Proxama (PROX) sells Digital Payments Division for £1m (less working capital of approximately £0.3m and transaction costs) plus earn-out of up to £1m. No figs given to see if this is a good deal, or NAV gain.
Active Energy Group (AEG) has placed 83m shares at 2.1p, a 22% discount.
Imimobile (IMO) aquires Sumotext, an established US based communications platform provider, for $4.5m plus $1.5m earn-out. Trading - FY revenue and gross profit expected to be above market expectations.

Paul Scott

Hi Gus,

Yes, I'll mention the Q3 update from Next (LON:NXT) briefly, as it has good read-across for other retailers.

Overall it looks fine. However, the very mild recent weather is blamed for a sharp deterioration in sales trends by week. Very interesting graph from Next today;

I sold half my Next shares yesterday, just to be on the safe side. Am pondering whether or not to buy them back today. Not sure at the moment.

Regards, Paul.

daveinthelakes

CNBC just announced Next (LON:NXT) expected to open 4-10% down. If they open anything like 10% down I will buy more. Next are generally overly pessimistic and although the 4 weeks to mid October were weaker overall the quarterly trends show improvement in full price sales.

Note the growth in Directory sales versus the decline in bricks and mortar. I have mentioned before that online will be over 50% of sales within a couple of years.

Biome Technologies (LON:BIOM) I thought was too small but I see Paul did report on it last year, shares have doubled since then so maybe this is worth a look again.

ddinksdadd

Morning Paul,
LPA have a trading update out today which the market seems to quite like. Any chance of a hearing your thoughts on the update.
Im pretty new to this checking trading updates etc daily in the search for new ideas. I must admit to being a bit haphazard about my research on a daily basis so this forum is excellent to keep me from meandering off during the day! Excellent work!

I have just extrapolated the growth in Directory full price sales for Next (LON:NXT). comparing the quarter on quarter figures over last year.

Q1 +3.3%
Q2 +8.1%
Q3 +13.2%

This is a staggering escalation for such a large company with half a century of bricks and mortar history.

If the trend continues I expect full price sales for Directory to exceed those for stores by Q1 next year (May18).

I duly bought more when they opened.

Gromley

I'd take a slightly different slant on that; sales were comparatively good in August & September due to poorer weather and this has reversed in October with the milder weather. Essentially some people brought forward buying their winter-wear, so it is broadly neutral.

Today's share price reaction (down 6% now , was 8% early doors) largely just reflects that the positive reaction to the earlier better results was somewhat premature.

The Q4 guidance is interesting in Q3 full price sales (averaged across "retail" and Directory) were +1.3% and they are forecasting -3.3% for Q4, partly because Q3 had a small seasonal blip up (as above) and partly because Q4 is a tougher year on year comparative. (Q3 last year was -3.5% and Q4 only -0.4%)

Telling of how fragile retail sentiment remains when a 0.4% sales decline last year makes for a tough comparative.

Personally I'm still sitting on the sidelines with regards retailers in general.

(interesting point though by dave about the directory sales trajectory - that Q3 figure is probaly slightly inflated by the weather also)

FREng

Paul, It's interesting to see that you decided to buy Wey Education (LON:WEY) in BMUS this morning. The rise since Tuesday's results has been extraordinary. I'm long too.

Hi FREng,

Yes I was pondering Wey Education (LON:WEY) yesterday, and did some more research in the evening, which persuaded me to dip my toe in the water, with an initial purchase.

I'm trying to find third party evidence that the business is good, and found these interesting links;

Discussion on Mumsnet (some is quite old, but interesting bull & bear points)

A pupil's own video on what it's like to study at InterHigh, by an articulate 6-th form girl

Promotional video from the company - very annoying at the start, but worth persevering with, as it shows the IT platform, which looks very good.

There's no doubt WEY is expensive for what has been achieved so far. However, if the 60% rev growth continues, and the marketing effort planned for 2018 pays off, then who knows what the future holds?

I'm expecting it to fall back in price, after the current frenzy subsides, so I might pick up some more if the price does retrace.

P.S. I should add that, with this type of smaller growth stock, I usually open a position with a view to giving it about 2 years or more to work. So my usual strategy is to buy more if the newsflow is positive, or ditch them at any point if the original reason for buying has gone away.

slopsjon

Morgan Sindall Trading update today.

Trading in the second half of the year has continued to be strong, driven by a further improvement in margin in Construction & Infrastructure and further margin growth in Fit Out. As a result, the Group is on track to deliver a full year performance slightly ahead of its previous expectations which were set at the time of the half year results on 8 August 2017.

In addition, the Group expects that its average daily net cash for the full year will be in excess of GBP100m, ahead of previous guidance of not less than GBP75m.

The Group's committed order book as at 30 September 2017 was GBP3.8bn, up 5% from the year end position (up 1% from the half year), whilst the regeneration & development pipeline of GBP3.3bn was up 2% from the year end (level with the half year).

Crusty

Zotefoams is not so much the commodity car seat foam market, but high performance chemical and fire resistant versions in specialist higher margin areas where the growth is. At least that’s my understanding. I’m long.

Mark Simpson

very minor correction on Zotefoams (LON:ZTF) '...this is a specialist maker of foam (e.g. for car seats). Unlikely that their foams are used for car seats unless as very small blocks for noise/vibration management. Car seat foam manufacture is integrated into the large global JIT suppliers. Their main Automotive applications are under-bonnet for noise/vibration management. I don't see where they break out their revenue into sectors but I expect their automotive volume is low as a proportion of sales so exposure is maybe limited?

JakNife

Is the "RBG" in the title by accident?

Miserly Investor

Hi Paul,

Regarding Zotefoams (LON:ZTF)

It's a pity that the company omitted to put a footnote in, stating what it believes the range of market expectations actually is. More companies are doing that now, and it's extremely helpful to investors - especially private investors, who often don't have access to broker forecasts.

Stockopedia shows a consensus broker EPS forecast of 15.2p for calendar 2017. So presumably the company will report a bit above that figure - maybe around 16p? That would value the share at a PER of 23.7.

If Stockopedia are sourcing their data from Reuters, I wonder if it would be possible for them to import the range of analysts' estimates in Reuters, rather than just the mean figure (unless they already do somewhere and I've missed this)?

For example with reference to this Reuters page for Zotefoams (LON:ZTF):

http://uk.reuters.com/business...

There's a table as shown below where I've put a red box around the relevant EPS estimates for 2017:

This shows the mean number of 15.15p (rounded to 15.2p in the Stockopedia report), a high of 15.40p and a low of 14.80p.

Armed with this information, we could more reasonably assume 15.40p as the "top end of the range of market expectations"?

Best,

tic_tac_toe

I am also wondering that

Tortoise investor

To connect Paul's coverage on the first two companies: If Begbies Traynor (LON:BEG) are right and that consumer borrowing is a bubble waiting to burst, doesn't that have the potential to hit £NXT? In 2015 The Guardian (not always to be trusted!) reported that Next's credit arrangements accounted for a third of its directory profits so not an insignificant amount. Any bubble bursting may hit the credit business, lead to a regulatory clampdown, and also make the market nervous about touching companies with a credit business.

I appreciate it may represent only a part of profits but it's something to keep half an eye on I think.

(I don't hold Next (LON:NXT) currently having sold at around 5,000p but may get back in closer to 4,000p as I would expect profits to fall again next year).

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

Next (LON:NXT)

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Paul Scott

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