Small Cap Value Report (Wed 11 July 2018) - BRBY, SWL, ORCH, SFE, BLTG, SOS

Wednesday, Jul 11 2018 by

Good morning!

Football is the major story today. There's also quite a lot of stock market news:

10:30 AM: I have taken Alpha FX (LON:AFX) off the list, because it's an "in line with expectations" update. I've also taken Fishing Republic (LON:FISH) off the list, because its market cap is so small. Paul will be in touch soon with his thoughts on Sosandar (LON:SOS).

12:45 PM: Ditched a few more.

It's too big for this report, however one of my top holdings Burberry (LON:BRBY) released a Q1 trading statement that was in line with expectations.

Retail revenue was flat due to currency headwinds, or +3% at constant FX. "Comparable sales", which includes online sales and is measured at constant FX, was also +3%. There was no change to guidance, except that current exchange rates are more favourable. It remains on track for £100 million of cost savings.

The share price is down 4.5% as I type. Investors were evidently pricing in a little extra. There is also continued uncertainty to be faced as the company beds in a new Chief Creative Officer and responds to weak trading in the UK, Europe and the Middle East.

Personally, I continue to hold. These shares have been in my portfolio since January 2016, and I would like to keep them for the foreseeable future.

Swallowfield (LON:SWL)

  • Share price: 275p (-13%)
  • No. of shares: 17 million
  • Market cap: £47 million

Trading Update

This is of particular interest to me, as I own shares in the similar company Creightons (LON:CRL). Both are engaged in the manufacture of personal care products, and manage their own brands.

Today's full-year update is broadly in…

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

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Burberry Group plc is a manufacturer, wholesaler and retailer of luxury goods. The Company also licenses third parties to manufacture and distribute products using the Burberry trademarks. The Company's segments include retail/wholesale and licensing. The Retail/wholesale segment is engaged in the sale of luxury goods through Burberry mainline stores, concessions, outlets and digital commerce, as well as Burberry franchisees, prestige department stores globally and multi-brand specialty accounts. The Licensing segment is engaged in the receipt of royalties from the Company's partners in Japan and global licensees of eyewear, timepieces and European childrenswear. The Company's product divisions are Womens, Mens and Childrens apparel, Accessories, and Beauty (which includes fragrance and make-up). Its subsidiaries include Burberry Latin America Holdings, S.L, Burberry (Suisse) SA, Burberry (Taiwan) Co Ltd, Burberry (Thailand) Limited and Burberry FZ-LLC. more »

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Swallowfield plc is a United Kingdom-based company, which is engaged in the development, formulation and supply of personal care and beauty products. The Company has presence across other European Union countries and rest of the world. The Company offers its products in various product types, such as personal care aerosols, hot pour, premium liquids/tubes/roll-ons, fragrance and gifting, and color cosmetics and pencils. The Company's manufacturing, filling and aerosol packaging capabilities include traditional system in tin-plate or aluminum cans to bi-compartmental systems, such as bag on valve (BOV) and bag in can (BIC). The Company offers its products in various brands, such as TRU SHAVE and MR JAMIE STEVENS. The Company offers a range of services, such as project management, sourcing, manufacturing and logistics. The Company offers warehouse facilities for chemicals, raw materials and finished goods, as well as a global distribution network capable of bespoke delivery. more »

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Orchard Funding Group plc is a finance company. The Company specializes in insurance premium finance and the professional fee funding market. The Company provides funding and funding support systems to insurance brokers and professional firms through the trading subsidiaries. The Company's segments include insurance premium funding and professional fee funding. The Company provides finance to clients of insurance brokers. The Company has two businesses: Bexhill UK Limited and Orchard Funding Limited. Bexhill UK Limited provides insurance premium funding to the United Kingdom insurance brokers. Bexhill UK Limited provides credit to limited companies, partnerships and consumers. Orchard Funding Limited provides professional customized fee funding solutions to accounting firms, professionals and small businesses, enabling them to provide extended credit to their business clients. more »

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

42 Comments on this Article show/hide all

ls2g08 11th Jul '18 23 of 42

Hipgnosis Songs Fund (LON:SONG) launched today - it was mentioned in a prior SCVR. Looks like a positive lisitng. They also announced the acquisition of 75% of a music catalogue from Terius Nash containing well known hits such as Umbrella by Rihanna, Single Ladies by Beyonce and Baby by Justin Bieber. Also hits by Jay-Z and Kayne West are included. I feel this is quite a good quality acquisition.

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iainc 11th Jul '18 24 of 42

In reply to post #381289

Hi Graham,
Thanks for the updates again today.

Re Burford Capital (LON:BUR), Repsol accepted $5billion for their 51% share in YPF. The Petersen share was 25%, thus indicating a value of ~$2.5 billion (plus interest since) for Burford's petersen asset.

Burford is entitled to 70% of the recovery in the Petersen matter (from which Burford will need to pay meaningful expenses which would be expected to reduce Burford’s recovery to something below 60%)

So this equates to $1.5 billion (plus interest).

But the RNS today stated a carrying value of only $800million - "implying a valuation of $800 million for our original total Petersen entitlement".

Seems like a very conservative valuation 

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HornBlower 11th Jul '18 25 of 42

In reply to post #381259

a higher profile broker is a positive move for Sosander. They seem to be well advised financially. Initiation note from Shore is obviously going to be positive otherwise they wouldn't have got the mandate. this could be 5x in a years time with current revenue trajectory.

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Merlotman 11th Jul '18 26 of 42

Graham thanks for your coverage of Burberry (LON:BRBY). I don't hold but did a comparable analysis with Next (LON:NXT) and decided on the latter due mainly to value. Interested to see you hold both - presumably you are comfortable with two significant holdings in same sector as as Burberry (LON:BRBY) is an international brand focused on a store based luxury retail offering whereas Next (LON:NXT) is more of a strong UK general brand moving online. I still can't help that there would be some correlation in SP were UK consumer spending to take a dive. As an aside I don't tend to invest in small caps but do appreciate your and Pauls commentary on larger cap stocks and macro issues. Keep up the good work!

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Graham Neary 11th Jul '18 27 of 42

Thanks merlotman. Re: Burberry (LON:BRBY) and Next (LON:NXT), they are very different holdings, for the reasons you outline. I much prefer Burberry (LON:BRBY) to be honest, but saw value in Next (LON:NXT) when I purchased it, and continue to hold. The correlation doesn't seem too scary, as they serve such different markets. All the best. G

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rhomboid1 11th Jul '18 28 of 42

In reply to post #381259

Thanks Paul...this is the type of investment that I really hate but your analysis was fantastic in explaining the investment proposition in a way that made sense of the valuation

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JohnEustace 11th Jul '18 29 of 42

In reply to post #381289

I agree re Burford Capital (LON:BUR). I was going to suggest you not bother to cover it earlier on but kept quiet in case you had a different take on things.
I think Burford will just be pleased that the Petersen case can start to move forward again towards a resolution, but I expect the Argentine government will still try to delay every step of the way. Kicking the can down the road seems to be the key political skill of our times.

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paraic84 11th Jul '18 30 of 42

Does anyone know if the proposed US tariffs affect British products made in, or shipped from, China? Could be messy for some companies if they are affected and are major exporters. I see they apply to a host of consumer and agricultural products.

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cholertonandrew 11th Jul '18 31 of 42

In reply to post #381259

Re Sosandar

Hi Paul, thanks for your notes on Sosandar which I hold. I don’t have much experience of investing in clothes retailers and wanted to ask you a couple of questions. Do you think the first quarter revenues for the new financial year could have been strongly positively impacted by such hot weather and do you know if clothes purchases are significantly cyclical or fairly evenly spread across the year? I’m just trying to take a read from the indicated first quarter revenues about what that can tell us for expected full year sales to end March 2019.

Well done on the early purchase. Trading (in my view) is looking very encouraging.


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JohnEustace 11th Jul '18 32 of 42

In reply to post #381334

Hi Paraic,
I'm not sure I understand the question. If it's made in China, how is it a British product?
If it's made in China by a Chinese company that has a British parent company and shipped to the US, then yes I would expect the Trump tarriffs to apply. Similarly if it's made in China for the British company by a contract manufacturer.
If it's made in China and imported direct to the UK then the existing EU tarrifs would apply, not US.

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Paul Scott 11th Jul '18 33 of 42

In reply to post #381339

Andrew asked;

Do you think the first quarter revenues for the new financial year could have been strongly positively impacted by such hot weather and do you know if clothes purchases are significantly cyclical or fairly evenly spread across the year?

That's a good point actually. The quarter ending 31 March is the quietest quarter of the year for fashion retail. So there would be a seasonal step-up in sales from calendar Q1 to calendar Q2. That seasonal increase this year would have been enhanced by bad weather in Q1, and good weather in Q2.

Off the top of my head, thinking back to my days working in the sector, the seasonal uplift would be roughly 20% I think. But that was for a business which had very young customers. Sosandar's seasonal uplift might be different, as it has an affluent & middle-aged customer base, which presumably doesn't need to economise on discretionary spending after Christmas, like younger people do.

So the short answer is that yes there would have been some seasonality benefit in Sosandar's Q1 to Q2 sales uplift, but nowhere near the 73% they reported, in my view.

Regards, Paul.

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davidjhill 11th Jul '18 34 of 42

In reply to post #381259

Good write up Paul
Sosandar (LON:SOS) is one of the most exciting ground floor stories I've seen in a while and the triple digit annualised growth certainly demonstrates what you'd hope to see given the low starting revenue base.

I agree that valuation is indeed tricky but I'd put this akin to an early stage tech company (I know there are differences, but valuation metrics are similar). Rule of thumb is 8-10* revenue so £28m - £50m or 33p-60p feels like an appropriate range to me.

That said, like yourself, I am in for the longer term provided revenues continue to grow at an appropriate pace as I believe in the management.

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richjp 11th Jul '18 35 of 42

Paul re Sosander,

I am a holder since the UK Investor Show so I am doing nicely.

If the market opportunity is as good as they say, what do you think would happen if someone like ASOS went after the same market? Do SOS have any form of USP that enable them to withstand that sort of competition?

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Paul Scott 11th Jul '18 36 of 42

In reply to post #381369

Hi richjp,

If the market opportunity is as good as they say, what do you think would happen if someone like ASOS went after the same market? Do SOS have any form of USP that enable them to withstand that sort of competition?

I don't think any fashion business really has much of a USP. It's all about consistently offering customers products that they want, at the right price, and of decent quality. Then happy customers return, word spreads, thus building the business.

The good thing about Sosandar (LON:SOS) is that it's tackling an under-served part of a large market, and seems tuned in to what its customers want. An interesting snippet from my telecon with management today, was that the demographics of Sosandar's customers are turning out to be far broader than they anticipated. So it's not just 35-55 women who are buying their products, that is only 51% of their customer base.

Perhaps surprisingly, 55-64 year olds are 23% of their customers, and 9% are over 65.

At the other end, 18-34 year olds make up 17% of their customers.

I like that, because it means that the lifetime value of a Sosandar customer should be large - e.g. a customer who discovers Sosandar aged 40, could conceivably have a lifetime value of 25-30 years. Contrast that with the young fashion chains like BooHoo, which is constantly having to recruit new teenage customers, to replace the ones who drop out when they get to (say) their mid-20s.

In other words, the marketing spend that SOS makes now, should generate a long stream of future earnings from each customer. Although the cost is up-front, and the benefit is gradual. The report today showed what seemed to me to be pretty good figures on repeat customers - that's a key metric I think.

All rather encouraging. There's a lot of future potential here, in my opinion. They seem to be getting all the core stuff right. The sales growth & eventual profitability should then flow through in due course, providing nothing serious goes wrong.

Regards, Paul.

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gus 1065 11th Jul '18 37 of 42

I think the last couple of paragraphs of the Burford Capital (LON:BUR) release are interesting following some earlier discussion on previous threads about their “earnings surprise” potential.

Basically, they say that while they appreciate the coverage they get from investment analysts their earnings forecasts are less guided by the company than might be the case for say a typical manufacturing company. Given the nature of their service, they see the embedded value of their ongoing cases as being commercially sensitive and neither lead the analysts nor comment on the accuracy or otherwise of their forecasts. The only reliable interim mark we get is when they come to sell a piece of an ongoing case and even this is often opaque in terms of disclosing exactly is being sold and on what terms. In the past Burford Capital (LON:BUR) results have tended to blow away analyst forecasts on the upside - this commentary maybe helps to explain why.


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Jardine 11th Jul '18 38 of 42

Just an observation which demonstrates maybe the time it takes for new management to understand how their particular "train set" works, but three of today's announcements are from companies which have recently had new CEO's and in each case have wiped around 20% off their value. They are Frenkel Topping (LON:FEN) Safestyle UK (LON:SFE) and Swallowfield (LON:SWL)

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cholertonandrew 11th Jul '18 39 of 42

In reply to post #381349

Re Sosandar: thanks Paul, that’s really helpful.


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abtan 11th Jul '18 40 of 42

In reply to post #381389

Hi Gus

I do hold Burford Capital (LON:BUR) and always thought the lack of updates on specific cases was a legal/sensitive matter.

However, I am signed up to receive alerts from IMF Bentham (same sector, listed, but based in Australia) and I am always getting updates on cases, often with numbers included.

I wonder why they seem so much open than Burford Capital (LON:BUR) ?


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iwright7 11th Jul '18 41 of 42

In reply to post #381389


It is an important point that you flag and maybe why Stockranks have historically tended not to score Burford Capital (LON:BUR) as highly as they might if Broker guidance was forthcoming...

Full text here: 

Trading Prospective investors and other market participants should not treat, and Burford does not intend to treat, the financial projections produced by research analysts as indicative of the market's expectations of Burford's future financial performance. We specifically eschew any obligation to correct estimates made by financial analysts or to inform the market should we come to believe that our actual performance will diverge from those estimates. This is, of course, different to the approach taken by most operating companies, in respect of which research analysts can produce relatively reliable estimates and the relevant company will advise the market if it expects to see performance materially different from the consensus of analyst forecasts. It is important that investors understand that Burford takes a different approach as a result of the different nature of its business.

What a great company!  Ian

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gary3980 12th Jul '18 42 of 42

Must admit I'm finding it hard to interpret the Swallowfield (LON:SWL) trading update - I hold.

What I'm juggling:

On the plus

- PBT significantly ahead
- Brands business significantly ahead, and expected to grow (this one one of my original drivers for investment). Revenues up 16% and (one assumes) already high margins now higher
- Contracts delayed, but now in full production and will contribute to next financial year
- Fish embedded well

On the minus

- increasing costs (in line with industry)
- net debt at £11m - but to significantly reduce. It doesn't give any indication to what
- operating margins significantly down

Forward PE now below 10, brands expected to continue to grow, contract business to improve profitability with new contracts underway, and debt to come down.

One nagging brexit doubt is that EU countries account for £23m of the £74m revenues - but was this already baked into share price weakness.

Anyone else in same boat / any thoughts on this one?


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

About Graham Neary

Graham Neary

Full-time investor and independent analyst. Prior to this, I spent seven years in the financial markets as an analyst and institutional fund manager. I'm CFA-qualified, also holding the Investment Management Certificate and the STA Diploma in Technical Analysis.Away from finance, my main interests are recreational poker and everything to do with China, especially Mandarin Chinese. more »


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