Small Cap Value Report (Wed 11 Apr 2018) - GMD, AIR, BLV, NXR, SRT | Paul Scott

11th Apr '18 by Paul Scott

60 comments 19716 reads

Good morning, it's Paul here!

I'm up early today, to finish off the unfinished sections from yesterday. There seems to be so much going on at the moment, which sometimes distracts me from the task in hand here.

Here are a couple of interesting situations which I've been immersed in recently, GAME Digital (LON:GMD) , and Air Partner (LON:AIR);

GAME Digital (LON:GMD)

Share price: 38.7p (up 7.6% yesterday, at market close)
No. shares: 172.9m
Market cap: £66.9m

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

Takeover bid speculation

NB. This is speculation on my part, but the reported trades yesterday do seem to suggest something might be going on.

I monitor all positions in my portfolio pretty much in real time, and when there's unusually large volume traded, I sit up and take notice. This can occasionally be a precursor to a takeover bid, if a potential acquirer is buying stock in the market. The trouble is, we don't know who is buying or selling, until the "holding in company" RNS(s) come out, day(s) later.

Sometimes though, very large volume goes through, and you can work out who is selling (but not necessarily who is buying).

In this case, with Game Digital, I noticed traded volume of over 60m shares early yesterday afternoon. Bear in mind that a more typical daily volume for this share is under 1m shares, so something unusual seems to be happening.

I got my broker to email me over the list of >3% shareholders, from his Bloomberg terminal, as I couldn't readily find that information on GMD's own website. Next, I looked at the reported trades for GMD yesterday (courtesy of MoneyAM), and noticed this block of very large trades;

The "buy" or "sell" indicator is meaningless, as by definition every trade in the market has to have both a buyer & a seller, otherwise the shares wouldn't change hands at all.

The trades I have highlighted above stand out like a sore thumb, because they are;

very large
at the same price of 35p
bunched together, happening a few seconds apart, so are very likely to be the same seller (not…

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mercury61

11th Apr '18

Thank you Paul for sharing. I really learn a great deal from your comments and others on this board. All the best.

Reacher

Hi Paul: That's some great analysis of GAME Digital (LON:GMD) and I wanted to express my thanks on the insights and also your commentary on the special situations. Plenty going on to keep us busy.

Gromley

Hi Paul,

On the subject of GAME Digital (LON:GMD) I absolutely agree with you that it looks like Elliott / Duodi selling out their stake (not only could they use the cash for their Waterstones bid, I also understand they are rumoured to be involved in a potential rescue for Claire's).

It seems premature to me though to presume that to presume that Sports Direct might be the buyers.

The highlighted 7 transactions are lots ranging in size from 2% to 12% of the total shares in issue, to me that looks more like a "placing" across several institutions.

Obviously that's all speculation until we see the Holdings Notices come in (the Sports Direct IR team have alreadt been on RNS this morning to post a transaction in own shares notice pertaining to yesterday - I'm not sure if I'm stretching too far for conclusions if I wonder if they would have posted any other holding notices at the same time?).

Personally, I'm not sure I see the logic of SPD increasing stake and forcing a bid, but we will see.

Lloyd Garvey

Norcros (LON:NXR) trading update to day

Group underlying operating profit(1) for the year is expected to be in line
with the Board's expectations.

Group revenue for the year is expected to be in the region of £300m (2017:
£271.2m), 10.7% higher than the prior year on a reported basis, 8.7% higher
on a constant currency basis, and 4.4% higher on a constant currency like for
like basis.

Other news that may be of interest this morning is a trading update from Norcros (LON:NXR) , I sold out a few months ago (I think the price is up slightly since then) but I think you still hold?

Overall they report in line, but (perhaps because I still have my gloomy head on with regards UK retail) I note the passage on Johnson Tiles

In 2017 we implemented a restructuring at Johnson Tiles UK designed to improve its operating performance and increase manufacturing flexibility. Notwithstanding the benefits of this restructuring the business remains loss making as market conditions experienced in the second half proved more challenging than expected. As a result, the Board has implemented a further restructuring programme which will involve the loss of up to 50 jobs. This will result in a charge of around £2.1m, to be treated as an exceptional item and recognised in the financial year ended 31 March 2018 with the subsequent cash outflow occurring in the first half of 2018/19. Annualised savings are expected to be at least £2m.

I'm not sure off the top of my head how big Johnson is (other than being I think c. £50m of revenue), but the previous restructuring had roughly the same cost (£2.3m) and involved the loss of 90 jobs, so overall this looks quite chunky.

Interested in any thoughts here.

MrContrarian

My morning smallcap tweet:

Air Partner (LON:AIR), SRT Marine Systems (LON:SRT)

Air Partner (AIR) shenanigans update: total restatement will be <£4m. "The Board believes that no shareholder should be further disadvantaged by the impact of this matter... intends to recommend that the final dividend payable for the year will be 3.8p." Reiterates underlying pre-tax guidance of not less than £6.4m. Review ongoing.

SRT Marine Systems (SRT) guides FY rev up 22%, pre exceptional pretax £1.3m, broadly in line with market expectations. "These results reflect the excellent progress we have made across all our business operating segments." Well, as a holder, I ain't dancing yet.

Brookeda

The big news that could impact Norcross (LON:NXR) is the situation with the pension deficit which will only come out when the full results are disclosed. If the gap as closed and by a meaningful amount we could see a revaluation. I will hold until then

Carcosa

GAME Digital (LON:GMD) Presumably it cannot be Sports Direct or a related party otherwise they would have to make a mandatory offer given the percentage of shares they would now hold (?)

andrea34

Re GAME Digital (LON:GMD) Paul, as per your excellent analysis concluding the massive stake sale by Duodi, we can see all the sale trades going through... but there are no corresponding buy trades...? Why can't we see those?

mrosbiston

GAME Digital (LON:GMD) Sports Direct would have to announce a mandatory offer 'if' they were the name that acquired the 36% of the shares. They have 28 days to do so following the purchase of the shares.

It it is not Sports Direct, but another name who acquired all the shares, same would apply for any purchase >30%.

GAME Digital (LON:GMD) would also have to issue a response to any takeover rumours.

Handy guide: https://www.slaughterandmay.com/media/39320/a-guide-to-takeovers-in-the-united-kingdom.pdf

Every trade has a buyer and a seller. Yes, sometimes these can be a sale to a "market maker" from a shareholder or the reverse.

But there is no way the "market makers" would take on over one third of the shares of a company (AIUI they usually try to have a broadly neutral book).

These were trades by one institution (Elliot) to other institutions (tbc), the fact that the price was at the bottom of the spread suggests that it was the seller who instigated the trade, although to be honest to be able to offload this volume of shares without going below the spread strikes me a being a very good deal by the seller. I would say these transactions were discussed and planned over many days and possibly Elliott convinced the buyers that the fact they were known sellers was depressing the market price.

Joeydisco

Hi Paul,

The UK takeover rules state the following:

"When a person or group acquires interests in shares carrying 30% or more of the voting rights of a company, they must make a cash offer to all other shareholders at the highest price paid in the 12 months before the offer was announced (30% of the voting rights of a company is treated by the Code as the level at which effective control is obtained)."

hxxp://www.thetakeoverpanel.org.uk/th...

Therefore wouldn't any takeover bid for GMD have to be for at least 61.5p?

Asagi

r.e. Belvoir Lettings (LON:BLV)

Total divis flat at 6.9p - great yield of 6.7%

a minor correction, Paul. The dividend was actually increased slightly, to 6.9p from 6.8p.

Another issue is that the Government action to abolish lettings fees could harm future profits. I didn't find sufficient reassurance in the narrative to find comfort on this problem

Agreed.

Asagi (long BLV)

AnonymousUser252054

I don't know if this has been posted already, but for anyone interested I see you can now vote in the Mello2018 Investor Awards for one's favourite online share blogger here.

You may recognise a couple of familiar names in the shortlist.

mammyoko

Re GAME Digital (LON:GMD) - reasonable to assume that this holding was, at some point during the placing process, offered to £SPD? If Secured Property Developments (OFEX:SPD) not the buyer then also reasonable to assume that Ashley doesn't want to bid for £GMD? Otherwise, he would have taken it.

Oops re £SPD!

This is unless Sports Direct setup a SPV to acquire shares or some other proxy acquirer - and the purchase of controlling rights could be split up.

Then they would likely meet the part of the code that stipulates the acquirer should offer at a minimum at the same level as the highest price Sports Direct paid in the last 12 months.

Sports Direct acquired their stake on 12 July 2017 at around 24p (to my knowledge they have not bought or sold shares since)

LeoInvestorUK

Interesting market response from both Boohoo.Com (LON:BOO) and ASOS (LON:ASC) to the latter's inline interim results. BOO is currently down approx 5% reversing yesterday's gains and ASOS is down approx 8% with heavy volatility compounding recent falls.

ASOS emphasised today that they are in an investment phase and this seems likely to have spooked the market, but the same applies to BOO and neither have ever paid a dividend.

BOO continues to look much better value with a forward PE of approx 40 and recent 100% revenue growth vs ASOS with a PE of approx 60 and recent 25% revenue growth. Boohoo.Com (LON:BOO) 's margins are also intrinsically higher, although their recent price "investment" (i.e. cuts) make it difficult to see by how much.

ASOS also has more to lose in terms of rating and momentum and I remain bullish BOO (medium term) and bearish ASOS (short term).

(edited as tilda symbol meaning approximately had been replaced with what looked like a minus sign).

Wimbledonsprinter

Thanks Paul, you must be correct that the seller of GAME Digital (LON:GMD) can only be Elliot. Elliot has a reputation as one of the smartest of hedge funds, therefore they are unlikely to have been duped over on this trade - obviously they have been a seller for some time after gaining control of Game - presumably through buying the debt ahead of the previous restructuring.

I am sceptical that Sports Direct could have gone over 30%, without having had to announce it already. Going over 30% would trigger a mandatory bid and therefore the creation of a false market (if not confirmed), which the Takeover Panel is always keen to avoid. While Mrobiston (post 10) is correct that they have 28 days to launch a bid - this is to launch the bid - not to announce the crossing of the threshold.

I would add Bonmarche Holdings (LON:BON) and UP Global Sourcing Holdings (LON:UPGS) to Paul's list of downbeaten retail / consumer shares.

Bonmarche Holdings (LON:BON) - Has cash with a EV PE of below 4x. Would benefit from higher interest rates due to cash and age of customers. Stores well invested. "the flexibility of leases means...we are in a position to alter the profile of our store estate relatively quickly".

UP Global Sourcing Holdings (LON:UPGS) - Drop in profits is quite likely to be temporary due to destocking (etc), but still a forward PE of 6.25. Large director buys. Some debt but appears manageable, falling and with positive TNAV. (H1 Results due 30/4).

(After the Conviviality (LON:CVR) experience I sold out of Connect (LON:CNCT), but they may also be due a bounce)

Small Cap Value Report (Wed 11 Apr 2018) - GMD, AIR, BLV, NXR, SRT

GAME Digital (LON:GMD)

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Paul Scott

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