Small Cap Value Report (Wed 10 April 2019) - TND, SRT, NXR, W7L, ALT, INDV

Wednesday, Apr 10 2019 by

Good morning!

Today I am looking at:

Tandem (LON:TND)

  • Share price: 177.25p (+4.3%)
  • No. of shares: 5 million
  • Market cap: £9 million

Final Results

(Please note that at the time of publication, I have a long position in TND.)

I swore that I'd never touch this share again, and have been an outspoken critic of management at this company - they are paid far too much relative to the size of the business and relative to shareholder rewards, and they spent a lot of money on acquisitions which simply didn't work out very well.

See my comments in September, describing the entrenched board of directors. See my pained description of the company's positives and negatives in July.

In a presentation at the Manchestor Investor Show last year, I laid out in detail the unpleasant metrics: director pay being 33% of operating profit and four times larger than the dividend.

Despite all of the above, I couldn't resist buying a few shares in it today.

It's a trade designed to minimise pain: I wouldn't be able to stomach losing a lot of money twice on this share, but I think it would be even more painful to watch it rally to a decent earnings multiple. So now I'm back with a small stake.

So why am I back in?

Well, it looks as if the company just had an extraordinary H2. There have been false dawns before, of course. So I'm not going to assume that things are going to be rosy from now on. 

About the company

Tandem is a designer, developer, distributor and retailer of sports, leisure and mobility products. It has a freehold property at its heaquarters in Castle Bromwich (Birmingham) and rents other premises.

It was already back on my radar as my friend Professor Glen Arnold has been blogging about it in recent days at the Deep Value Newsletter on ADVDN. He reckons there is value in it at the current level, and I agree, but with some heavy qualifications!

It used to be focused on bikes but is…

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

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Tandem Group plc is a holding company. The Company is engaged in the design, development, sourcing and distribution of sports, leisure and mobility equipment. The Company operates in two segments: Bicycles, bicycle accessories and mobility, and Sports, leisure and toys. The Company's subsidiaries include Tandem Group Cycles Limited, which is engaged in the design, development, sourcing and distribution of sports, leisure and toy products; MV Sports & Leisure Limited, which is engaged in the design, development, sourcing and distribution of bicycles and accessories; Pro Rider Limited, which is engaged in the design, development, sourcing and distribution of mobility and leisure products, and E.S.C. (Europe Limited), which is engaged in the design, development, sourcing and distribution of leisure products. more »

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SRT Marine Systems plc, formerly Software Radio Technology plc, is engaged in the marine technology business. The Company's principal activity includes development and supply of automatic identification system (AIS)-based maritime domain awareness technologies, and derivative product and system solutions for use in a range of maritime applications from safety and security to fishery management and environment protection. AIS is a mesh network radio communications system technology specifically designed for the marine domain, and it uses a combination of global positioning system (GPS) and high frequency radio to enable real time, simultaneous data communication between multiple, independent entities providing information, such as identity, GPS position, speed and other customized data. It offers a range of AIS products and maritime domain monitoring system solutions, which also fuse other maritime sensor technologies, such as radar, closed-circuit television and communications. more »

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Norcros Plc is a holding company for the Norcros Group. The Company's principal activities include development, manufacture and marketing of home consumer products in the United Kingdom and South Africa. The Company's segments include UK and South Africa. The Company has six United Kingdom businesses, including Triton Showers, Vado, Croydex, Abode, Johnson Tiles and Norcros Adhesives, and three businesses in South Africa, including Johnson Tiles South Africa, TAL and Tile Africa. The Company is focused on showers, taps, bathroom accessories, tiles and adhesives. In the United Kingdom, the Company offers a range of bathroom and kitchen products both for domestic and commercial applications. The Company offers mixer showers and accessories; tile and stone adhesives; taps, bathroom accessories and valves; bathroom furnishings; ceramic wall and floor tiles; kitchen sinks; tile adhesives, pourable floor coverings and tiling tools through its United Kingdom and South Africa business. more »

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

36 Comments on this Article show/hide all

Edward John Canham 10th Apr 17 of 36

Indivior (LON:INDV)

The US does have a bit of a history of bringing UK companies low.


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Snoo 10th Apr 18 of 36

That Indivior (LON:INDV) fall is staggering.

Seems quite a punt on whether the legalities will work. They have plenty of cash.

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gbjbaanb 10th Apr 19 of 36

In reply to post #467761

I think you've put the cart before the horse - Ashley gets involved *after* companies have shown themselves to be mismanaged or useless. Picking them up on the cheap seems a sound strategy if you think you can turn them around, and looking at the success of SPD, he probably can.

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Velse 10th Apr 20 of 36

In reply to post #467891

It's hurting Reckitt Benckiser (LON:RB.) (former owners) too - down 6%.

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Aaron Ramsey 10th Apr 21 of 36

Indivior (LON:INDV) please

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sharmvr 10th Apr 22 of 36

Hi Graham et al,

Would welcome your thoughts on £W7L and Walker Greenbank (LON:WGB) if time permits.

Walker Greenbank (LON:WGB) - I hold - I don't think these results make for pleasant reading but the brands operating margin suggests the brands have some value and the US seems to be doing reasonably well.
Given the valuation, brands and now reduced dividend, I think this could be an attractive long term hold.
The business is well managed and the reporting is fantastically clear.

Considering adding but concerned about true debt / pension position, although by my count, but ROCE is good even when those are included in capital.

£W7L - The results look good and business performance seems to have stabilised since the profit warning and its got margins that were better than I would have expected given the positioning.
Personally, I would like to increase my exposure to the sector and have this and PZ Cussons (LON:PZC) on the radar.

Biggest concern for me is the fact that operating cash is consistent below earnings, and would have been worse this year had it not been for the one off receivable, although Free Cash as % of Operating Cash is very strong.
From what I can tell, it gets tied up in inventory, which they do explain.
Product extensions and increase in SKUs suggest this is an innovative business, but at the same time too many SKUs add complexity and increase the risk around inventory valuation.
That said, I don't have any expertise in make-up.

Many thanks,

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Graham Neary 10th Apr 23 of 36

In reply to post #467926

Hi V, re: W7L. It looks reasonable but I also don't know why an investor would want to choose it over any of the others in the industry. G

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sharmvr 10th Apr 24 of 36

In reply to post #467951

Thanks for the write up Graham - great insights as always.
Two more companies to research, although for me I think those market caps are below my risk tolerance. I also think I would sleep easiest holding a pzc!

What's interesting is that there seems to be a substantial value premium based on size in this sector, which I expect is reflective of brand diversity/recognition/sustainability. And I guess size itself?

Disclaimer: anecdotal observation - have not spent any great time on this and I expect this applies across sectors.

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gus 1065 10th Apr 25 of 36

No longer in the small cap range but another data point for the state of U.K. retail, Dunelm (LON:DNLM) posted strong Q3 update this morning.

Shares have been on a roll so far this year up more than 70% since the start of January. Probably originally oversold IMO and likewise seem closer to full value now but certainly seem to be doing a lot of things right, especially with the parallel and closely combined improvements I both physical store and on line offering.


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bobsandy12 10th Apr 26 of 36

Thanks Graham and see your point on Tandem ! Was really looking forward to your view on Altitude which I am sorely tempted by after the Mello presentation but looks a tad pricey .....what do you think ?

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rmillaree 10th Apr 27 of 36

Norcros (LON:NXR)


although I would like to see more progress on debt reduction and I'd also like to see confirmation that the recent acquisition of a South African plumbing materials company ("House of Plumbing") goes without a hitch.

More progress ref debt reduction?

In some respects is todays news not proof in itself that the debt reduction plan is well on track and well within comfortable limits with regard to the level of profits they now make. the h1 debt level was 53.5 mill and they have reduced this to £36 mill in 6 months - based on £25 million of annual profits business this is now a very modest level (caveat below) of debt now - much more comfortable than when the profit was at the prior lower level for 2018 and the merlin acquisition yet to prove itself. They have managed the step change well after the acquisition of Merlin and the year end debt of £35 mill is not much more than the cash consideration paid for Merlin i think.  Why the need to wait for longer with regard to the debt?  if they are churning out profits of £12 mill plus each 6 months seems like its well under control.

One caveat in this regard is that presumably they will have extra debt now that the House of plumbing has completed 1/4/2019. upfront Cash consideration being approx 10 mill i think.

ok the other point about waiting to see how House Of plumbing beds in - ? are the numbers from house of plumbing really material enough to warrant caution for a company making £27 mill expected profits ye 31/12/2019  - the £10 mill upfront payment  seems small enough for me to say even if this unit doesn't 100% deliver that's probably only going to be 5% of group profits i would guess - maybe 10% max even if that unit made nil profit - and they fact they advised at outset  that its earnings enhancing sounds like its very unlikely to be materially bad news for this small add on.

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Graham Neary 10th Apr 28 of 36

In reply to post #468001

Hi, I agree with your general points re: Norcros (LON:NXR) - there are no complaints from me about the company's achievements so far! Nor do I consider it to be overleveraged. It's just a question of valuation and how much conviction someone might need to actually buy in at the current level. All the best. G

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john652 10th Apr 29 of 36

Altitude (LON:ALT) down 10% on a fairly innocuous statement saying all is well, perhaps market expecting more. Any other views why down ? Interested in your thoughts Graham 

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Graham Neary 10th Apr 30 of 36

In reply to post #468021

From what I gather, people are selling Altitude (LON:ALT) because of the lack of disclosure of KPIs and out of frustration that they are being left in the dark about the company's performance. But that is just based on bulletin board talk.

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rmillaree 10th Apr 31 of 36

Altitude (LON:ALT)
Looking at the tone of the outlook its not really saying anything is it with regard to the "current year" starting now expectations wise- i am guessing the lack of any update with regard to what the current year prospects will be is taken to be a negative. This may be the harsh if that's what the company always does and doens't comment at this stage of the year- but if there are "internal" or broker numbers for ye 31/3/2020 that are known and the company is happy with those numbers now why not communicate that fact to shareholders in a cautious manner rather than waffle about everything else but that important fact. To me good news mostly seems to come out faster and better communicated than not so good news for some reason.

or if the spike upwards pre announcement was based on expectations of out performance news - perhaps its natural that the price would spike down to where it was previously if the news is neutral.

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dangersimpson 10th Apr 32 of 36

In reply to post #467951

Hi Graham,

Re: Creightons (LON:CRL), Swallowfield (LON:SWL), £W7L - I see what you mean about the sector being much of a muchness. I have a small holding in £W7L, and shares in Gresham House Strategic (LON:GHS) who hold Swallowfield (LON:SWL). Probably ownership bias but I see a couple of reasons to prefer £W7L to Creightons (LON:CRL):

- Safety in a sector facing headwinds. W7L has Net Cash vs Debt for CRL & stronger current ratio.
- Better cash generation, means you get paid better dividend while waiting for a re-rating.
- Higher net margins which usually means more of a sustainable competitive advantage such as branding. CRL has a higher ROCE but this is generated by having much better asset turnover, on lower margins. This means CRL is potentially a better company operationally but given the choice I'd take the margins. It is a lot easier and cheaper to drive operational improvements to reduce WC than to move away from contract manufacturing into building brand strength.
- While CRL last set of results were impressive, W7 brand sales in the US up 38% in 2019, although from a very small base. I think it is less than clear which company will grow the most rapidly over the medium to long term.

I agree that it is a fine balancing act, but I just weigh down in favour of W7L given the above.



Book: Excellent Investing: How to Build a Winning Portfolio
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john652 10th Apr 33 of 36

Hi Graham, rmillaree, i can’t really make up my mind with Altitude (LON:ALT) I have a small holding as I stay away from jam tomorrow stocks but It’s close to midnight for this one I feel. I had a very open email conversation with the CEO 6 months ago and I wonder if they are a little naive. No kpi’s probably exactly the issue with the update. My thoughts on reading it was ‘and’, which you articulate better. If they hit their numbers, or exceed it will probably take off, the oppy is a big one, I’m hoping naive !

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mammyoko 10th Apr 34 of 36

In reply to post #467916

Indivior cash position isn't as strong as it seems:

Cash $924
Receivables $287
Current borrowings $(4)
Trade & other payables $(721)
Non-current borrowings $(237)

Net equity $66
Less: Intangibles $(84)

Potential provision $(1500)

Negative NTAV $(1518)

Clearly the projected fine would wipe Indivior (LON:INDV) out. But I guess this is a starting point for negotiation. Management have been actively negotiating a settlement with the DoJ for some time implying both that there is substance to the charges and that Indivior (LON:INDV) has offered too little. From memory, it already has a provision of around $450m for this claim as does Reckitt Benckiser (LON:RB.) So perhaps they will meet eventually meet somewhere in the middle ($2bn?) implying a further $500m hit for Indivior (LON:INDV). Given the weakness of the Balance Sheet, I don't think they could stomach that so it feels like this will be a long drawn-out affair. In the meantime, Indivior (LON:INDV) is fighting other battles and it's difficult to see how this is anything other than uninvestable at the moment.

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JamesHolmes 10th Apr 35 of 36

The all time chart for Indivior (LON:INDV) looks more akin to a depiction of the Himalayas or Grand Canyon with all the peaks and troughs. This is the opposite of a sleep well at night stock

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Zoiberg 15th Apr 36 of 36

Tandem (LON:TND) Share price kicks upwards om Monday March 1st. Trading update RNS appears on March 4th. How curious ! In conjunction with Graham's remarks on remuneration I am not inclined to invest here.

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About Graham Neary

Graham Neary

Full-time investor and independent analyst. Editor at Cube.Investments, small-cap writer at Stockopedia. Previously a fixed income analyst in the City and institutional fund manager. I'm a CFA charterholder and have the Investment Management Certificate and STA Diploma in Technical Analysis for good measure. When I'm not talking about finance, I enjoy recreational poker, chess and Mandarin Chinese. more »


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