Small Cap Value Report (Wed 10 June 2020) - PMP, QUIZ, RTN, EAH, FLO, CGS, VP, PHTM

Good morning, it's Paul here with the SCVR for Weds. Please see the header above, for the list of companies that I intend to cover today.

Estimated timings - there's loads of interesting news for me to cover today, so I've started at 7am, and will just keep going for as long as needed. There should be plenty of material in this report by the official finish time of 1pm.
Edit at 13:01 - I have to stop now, for an appointment, and to fetch some groceries for Mum. If I manage to finish off the last 3 sections later, then will ask Graham to flag it in tomorrow's report.

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Portmeirion (LON:PMP)

Share price: 385p
No. shares: 10.64m + x new shares TBC
Market cap: £41.0m (before placing)

Proposed Placing, Subscription & Open Offer

Portmeirion Group PLC, the designer, manufacturer and worldwide distributor of high quality homewares under the Portmeirion, Spode, Royal Worcester, Pimpernel, Wax Lyrical and Nambé brands...

Another day, another fundraising! It's an accelerated book build, which tend to complete very quickly - because the deal is largely done behind closed doors, by the time the announcement comes out. I'll update this section later with the precise details, when the second announcement is published, probably later today.

Key features;

Placing size - raising £10m, so that looks to be about a 25% increase in issued shares.

Price - "not less than 375p" - which is a modest discount, therefore existing shareholders have nothing to complain about.

Subscription - this looks like an additional subscription for new shares, small at £0.66m

Open Offer shares - only £2.0m, which is too small at just 20% of the placing. I think companies should offer more than this, ideally 50%+ of the number of placing shares. I say this because PMP shares are so illiquid, that it would be difficult for anyone but the smallest shareholders to buy more in the open market. More attention needs to be paid to looking after the interests of smaller shareholders. A good recent example of this was Revolution Bars (LON:RBG) (I hold), which did an open offer of 67% of the size of the placing, in order to look after its private investors.

Background - this is a turnaround under new management. Obviously it has suffered reduced sales due to covid, but new management also want to expand the business. In particular, they see opportunities to substantially grow online sales, which I like. See the RNS for more details of growth plans.

My opinion - I used to be keen on this share when it was growing profits, and paying good divis. Performance has waned in recent years, so I'm not madly enthusiastic about it any more. That said, the specific problems which hit recent profits (grey market sales undermining its South Korean market, and manufacturing inefficiencies for new ranges) seem to have been resolved.

FY 12/2020 results are obviously going to be poor, due to covid. It should be able to get back on track in 2021. The move to more online sales is ideal, and a good opportunity - especially if we have a second wave of covid.

This fundraising means that the group is more securely financed. It wasn't bad in the first place, especially as it owns freeholds to its factory and warehouse. Collecting in receivables from retailers and distributors could prove challenging, especially if any of them go bust. This is a generic issue that we should watch out for at many companies.

I saw a presentation from management recently, and my impression is that they're more ambitious for the group, wanting to expand product ranges, sell more online, improve performance in specific countries (e.g. Canada) where there is more opportunity, and develop 3 more major international markets (currently these are UK, USA, and S.Korea).

I don't see this share being a multibagger, but if new mgt execute well, it has the scope to possibly double in price over say 2-3 years, in my opinion. Plus it should be fairly secure, as best selling lines such as Christmas Tree, and Botanic Garden, provide ongoing & reliable sales.

Incidentally, I decided to try out Portmeirion's online offering, and bought a set of Botanic Garden crockery, which arrived earlier this week (see pic below). It's a lot heavier than I imagined - had been expecting a more delicate porcelain type of product, but it's actually quite heavy duty, and looks absolutely lovely. This set cost about £70 all-in, which struck me as good value for a classic, made in England product. Service was excellent - good communications, a quality courier used (DPD) which texted me to give a 1-hour slot for arrival of package, and all was well packed and undamaged on arrival.

With us not being able to dine out, home cooking is back in fashion, so maybe there's an opportunity for PMP to crank up its digital marketing and sell more product online through e.g. Facebook & Instagram ads. I think that's the plan, and it should work in my view. Digital marketing was very much neglected in the past, so there's a wide open goal in that space.

Overall then, I think this is looking an interesting opportunity at 375p per share.

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Spectra Systems (LON:SPSY)

(I hold)

A quick comment on a disappointing announcement today. A competitor has undercut SPSY on price, for one of its sales pipeline projects, for an Asian central bank.

The share was marked down heavily by the market makers, but is recovering now. A note came out from WH Ireland, saying that this contract was not in the forecasts, which remain unchanged. It also flags >$100m of other pipeline projects, with unquantified additional opportunities building.

Therefore, I'm fairly relaxed about this, and happy to continue holding. The last results were very good, and are worth a look.

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Quiz (LON:QUIZ)

Share price: 8.4p (up c.30% today, at 08:40)
No. shares: 124.2m
Market cap: £10.4m

Proposed restructuring of standalone retail store portfolio (pre-pack administration)

In order to protect the future for QUIZ, the omni-channel fast-fashion brand, the Board of the Company announces that it is proposing to restructure its standalone retail store portfolio.

This is an important announcement, and I suspect we'll see lots of retailers & leisure companies use the pre-pack administration or CVA insolvency processes to restructure, and ditch their over-rented sites. There's a CVA announced today from RTN - which I'll cover below later.

Quiz has 82 standalone stores, which are loss-making. Using a controversial (and surprisingly, it's legal) process, the subsidiary company which operates the stores is being put into administration. Shortly afterwards, the parent company buys up the assets (but none of the liabilities) for a price of £1.3m that has been agreed with the administrator. The creditors are shafted, and all the property leases terminate.

Quiz is then free to cherry pick the sites it wants to keep open (only the profitable ones), and can re-negotiate property terms with all the landlords. In the current situation, landlords don't want empty units, so they're likely to agree to any reasonable terms. This very much puts Quiz in the driving seat, and enables it to eliminate all loss-making shops, plus slash the rent bills on any shops it wants to keep. It very much gives Quiz an unfair advantage over other retailers that are soldiering on paying unaffordable rents.

I don't see any alternative to many other companies following suit with pre-pack administrations. Trade creditors and landlords bear the pain, as they end up with bad debts. On the upside, pre-packs are effective at preserving the maximum number of jobs. In this case it sounds like most employees (822 out of 915) are being retained. This implies that Quiz thinks it can do deals with landlords of most of the shops. I reckon it could even end up trading rent-free from some of them - after all, for the landlord the alternative is an empty unit.

It sounds as if the 3 Spanish stores are being ditched too.

Financial position - after this deal is done, Quiz will still have £5.9m cash, plus (unused) bank facility of £1.75m. It is in talks to arrange a longer term bank facility (currently expires 31 July 2020). Therefore it looks to have enough cash to be able to re-open and continue trading. Although getting supplies in will be a challenge, having just stuffed its suppliers with bad debts.

Outlook - sounds alright;

The Board believes that the proposed restructuring announced today will enable the Group to operate an economically viable store portfolio alongside its online, UK concession and international channels which are unaffected by today's announcement. The Group continues to believe that stores, with appropriate property costs and flexible lease terms, can be a relevant pillar in QUIZ's omni-channel model moving forward.

My opinion - this is a game-changer. By ditching loss-making stores, and renegotiating rents on every shop, Quiz should be able to move into profits again, once stores re-open. Moreover, I imagine mgt is likely to focus on only signing short term lease deals, push for turnover rents, and long rent-free periods. This is the ideal time to do such a pre-pack administration. It leaves behind a trail of destruction, with landlords & suppliers stuffed with bad debts.

For shareholders however, this is excellent news, and opens the door to a much more profitable company emerging. For that reason, I think Quiz is worth a fresh look after this key news. Risk:reward has just drastically improved for shareholders. That said, it wasn't a very good business to start with, and this is the second time it's had to go through insolvency procedures. In both cases this was caused by uneconomic leases.

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Restaurant (LON:RTN)

Share price: 70p (down 1% today, at 10:09)
No. shares: 589.8m
Market cap: £412.9m

Launch of the CVA for the Leisure estate

This is a large restaurant chain, including Frankie & Bennys, and it recently bought Wagamama.

We already knew a restructuring was on the cards. On Monday this week, the company said;

In order to meet both the immediate challenges and to build a post-lockdown business with a sustainable future, we are in discussions with our landlords regarding potential restructuring options for our Leisure estate. Our Wagamama, Airport Concessions and Pub operations are not affected by these discussions. [from RNS dated 8 June 2020]

Today it announces a CVA - a form of insolvency where only landlords take a hit, but on an agreed basis (they negotiate, then vote on it). Other creditors are unaffected, and the business continues trading.

My summary of main points;

• Sites affected are mainly Frankie & Benny's format
• Closing 125 sites, with 160 sites remaining - hence a big reduction, of 44% in site numbers
• Improved rental terms on 85 sites of remaining estate
• Exit from lease liabilities of 25 previously closed sites
• Other creditors (e.g. trade creditors, HMRC, and employees) not affected
• Chance of success probably boosted by consultation with British Property Federation

My opinion - no particular view either way. If the CVA is agreed by landlords, then it gives RTN a springboard to operate profitably in future, if covid is brought under control, and we get back to something like normality.

My main concern is that the Frankie & Benny's format is pretty rubbish really. We've been discussing that here for years - it's a tired format, even before covid struck. The fact that so many sites are being closed, instead of having a rent reduction, reinforces my view that this is a brand that has had its day.

Often a drastic CVA like this provides temporary breathing space, but companies often end up in trouble again, further down the road. It doesn't interest me at 70p, when we still have substantial uncertainty about what the future holds. I want really bombed out valuations, with multibagger potential upside, to take this level of risk.

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Eco Animal Health (LON:EAH)

Share price: 254p (up 27% today, at 10:26)
No. shares: 67.5m
Market cap: £171.5m

Trading Update

This company sells pharmaceutical products for animals.

I can't remember much about it. Although I did buy a few for my portfolio at some point last year, on recovery hopes, but must have chucked them out at some point. Today's update reads very well, hence the 27% share price rise.

Key points;

• Strong performance for FY 03/2020 - revenues & EBITDA "significantly ahead" of mkt exps.
• Strong sales & higher margins in H2
• Covid - limited impact to date
• Strong start to FY 03/2021, esp USA & China
• Conserving cash - due to "considerable uncertainty" in macro picture, hence divi suspended
• Ongoing product development, but reduced R&D in H1
• Order book - "good support" for H1 revenues
• Net cash £9.9m at 31 Mar 2020 (note that more than half is held in China)

Valuation - I can't find any broker notes. Stockopedia shows broker consensus of 6.2p EPS for FY 03/2020. Assuming that the "significantly ahead" EBITDA flows through to EPS, then what does that mean? Maybe 7-8p EPS at a guess? At 254p, the PER woulkd then be 32-36 - hardly a bargain. Although that year does include the H1 impact from Asian Swine Flu. Previous years seem to show EPS in the teens. A return to that, would bring the PER down to a more reasonable level.

My opinion - no particular view either way. It's good to see guidance from the company (about an improving H2) come true. Therefore management credibility is high.

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Flowtech Fluidpower (LON:FLO)

Share price: 76.5p (up c.3% today, at 11:47)
No. shares: 61.5m
Market cap: £47.0m

Trading update (AGM)

Flowtech Fluidpower plc (AIM: FLO), the leading specialist supplier of technical fluid power components and services, releases the following statement ahead of its Annual General Meeting....

This is a perfect announcement! All completely self-explanatory, as follows;

Prior to the impact of Covid-19 the business had been performing marginally ahead of our expectations in 2020.

The last part of March and the whole of April saw our Revenues reduce by approximately 40%.

The impact was approximately 30% in May and we are confident this improving trend will continue.

The cost reduction measures we had already taken, and those we took due to the outbreak, have led to an approximate adjusted EBITDA breakeven position in April and May.

We now look forward to a return to profitable trading as conditions improve. Our cash position remains good; we continue to operate with significant headroom to our aggregate £25m banking facilities.

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My opinion - very well done to FLO and its advisers, for providing us with clear information about how the company is actually trading. EBITDA breakeven in the bad times, means it should be fine, and able to move back into profit once recovery is more underway. Remember the housebuilders ceased operations for a brief period, and are now cranking back up again, as are other sectors.

Overall, there's probably medium-term upside on the share price, although it's not really something I'd particularly want to own.

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