Small Cap Value Report (Wed 11 Sep 2019) - BOTB, SFOR, EPWN, PEB

Wednesday, Sep 11 2019 by

Hi, it's Paul here.

Good morning! I'm settling into a pattern of writing from late morning, through to tea time, which works best for me. Therefore today's report estimated time of completion is 5pm.

Update at 16:57 - today's report is now finished.  I decided to have a bit of a ramble about macro stuff in the last section about PEB, so will check it for spelling & grammar mistakes next (I type fast & inaccurately when something interesting crops up!), and then invite your comments!

I see we have 1 or 2 subscribers who insist on giving each report a thumbs down, every day, late morning, presumably because they are displeased that the report isn't complete by then. We agreed some time ago (overwhelmingly supported by readers at the time) that I would take my time writing these reports, and not rush for any deadline.

Therefore if you want to see a completed report, please come back at the indicated (above in bold) completion time. Thanks.


Share price: 288p (up 6% today, at 11:12)
No. shares: 9.38m
Market cap: £27.0m

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

Trading update (AGM statement)

Best of the Best PLC, (LSE: BOTB) the online organiser of weekly competitions to win cars and other luxury items...

Trading seems to be going well;

The Group is pleased to report that the positive momentum to the start of the year, reported at the time of the full year results in June, has been maintained and the Company has continued to make good progress and is trading comfortably in line with market expectations for the current financial year.

I'm not a fan of the phrase "comfortably in line". Surely that must mean: slightly ahead? In which case why not just say so?

The last physical airport site has now gone. Therefore BOTB is now an online only business, which makes it simpler to manage. The physical sites had a different business model - high ticket prices, as one-off purchases. So that wasn't really compatible with the online model of much cheaper tickets, to encourage frequent purchases by customers.

Note that the gradual closure of the physical sites in recent years actually masked the stronger growth coming from online operations. With those sites now all gone, this means that the top line…

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Best of the Best Plc runs car competitions. The Company displays luxury cars as competition prizes in rented retail space within airport terminals, at shopping centers and online. The Company is engaged in selling tickets to passing airport passengers, as well as from online customers through its Website. The Company operates from approximately eight United Kingdom and over two international airport sites, as well as approximately from three shopping centers. The Company operates from various airport sites located at Gatwick North, Gatwick South, Birmingham, Manchester Terminal 1, Edinburgh, Dublin's Terminal 2 and Westfield shopping center located in London's Shepherds Bush. The Company's Indian franchise trades under the BOTB brand from Hyderabad airport. The Company carries out its principal operations in the United Kingdom. The Company's subsidiary is Best of the Best ApS. more »

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S4 Capital PLC is a United Kingdom-based company that provides digital advertising and marketing services. The Company has three business components: creative content & innovation, assets at scale, and platforms and e-commerce. The creative content & innovation pillar offers clients content and cutting-edge Virtual Reality ('VR'), Augmented Reality ('AR') and experiential projects. Assets at scale, which focuses on asset production across programmatic advertising, precision marketing, content production and the localisation and adaptation of global campaign rollouts. Platforms and e-commerce, which focuses on the development of websites, applications and other internal e-commerce platforms primarily for multi-national clients. more »

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Epwin Group Plc is a manufacturer of extrusions, moldings and fabricated low maintenance building products, operating in the repair, maintenance and improvement, new build and social housing sectors. The Company operates through two segments: Extrusion and Moulding, and Fabrication and Distribution. The Extrusion and Moulding segment is engaged extrusion and marketing of polyvinyl chloride-unplasticized (PVC-U) window profile systems, PVC-UE cellular roofline and cladding, rigid rainwater and drainage products and wood plastic composite decking products. It operates from extrusion and molding facilities in Telford, Tamworth and Scunthorpe, among others. The Fabrication and Distribution segment is involved in fabrication and marketing of windows and doors, distribution of cellular roofline, rainwater and drainage products, and manufacture of glass sealed units. It operates from over five window and door fabrication sites, and approximately two glass sealed unit manufacturing sites. more »

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

31 Comments on this Article show/hide all

JohnEustace Wed 11:58am 12 of 31

In reply to post #512071

I also bought £AV and £LGEN at the same time!

Jefferies say today about Aviva:

"Aviva is the only Large European insurer that trades near its 2016 Referendum low. However, herein lies the opportunity; with a market-implied Cost of Equity of 12.4% and implied growth rate of just 2.2%, Aviva has an enticing valuation and is actively addressing balance sheet concerns. Moreover, with a potential sale of Aviva Asia and CMI_2018 releases on the horizon, we believe Aviva is taking decisive steps to create a Fortress Balance Sheet."

There are also user comments on FT Alphaville that £AV are a sitting duck for a takeover bid.

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Paul Scott Wed 12:12pm 13 of 31

In reply to post #511951

Morning andrea34l,

I'm sure we'll get used to the new placeholder article thing after a while. Maybe it needs me & Graham to remind readers in the preamble each day, that each week's placeholders are now going up in one batch.

Thanks for the prompt re S4 Capital (LON:SFOR) - yes, I will add that to my list of things to report on today. I had a look previously at its last trading update, and thought that it looked interesting, although I think the accounts had a couple of amber flags in them.

Regards, Paul.

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Paul Scott Wed 12:46pm 14 of 31

In reply to post #511966

andrea341/Paul/Stocko - The problem today is that

goes to yesterday's report.

Ah yes, I think the problem with that, is that I have to remember to set a flag on each day's report to make it come up on the SCVR landing page, and sometimes I forget. As it becomes part of my daily routine, I should gradually automatically remember to do this. In the meantime, as I gradually get used to doing that, readers can just find the placeholder articles by looking in the discusssion main heading. Graham & I are going to put up every week's series of 5 placeholders in advance, so there should always be a placeholder available in advance of each day.

I'm sure we'll all get used to it in time. Teething problems, etc.

The alternative is that we set the SCVR flag on all 5 placeholder articles in advance. But the problem with that, is the SCVR landing page would show at the top, 5 empty reports.

Regards, Paul.

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Graham Fraser Wed 1:03pm 15 of 31

M Winkworth (LON:WINK) Interims appear steady, slightly down on last year.

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mojomogoz Wed 2:01pm 16 of 31

Aviva (LON:AV.) and Legal & General (LON:LGEN) - could be great investments. Does anyone understand their balance sheets and liability exposure? In addition, what drives revenue growth prospectively?

I think a lot of macro, political and financial risk is embedded in these stocks beyond the 'mere' risk of their books.  But is there enough risk priced?...and what is are the odds of relatively catastrophic future risks? In a world of supposedly dead inflation and negative yields a fair degree of financial whiplash could come out of the blue....and that is magnified through these companies. Who knows, maybe in a few years time they need emergency equity raise as yields have risen dramatically and although that means their long duration liabilities have collapsed structured retirement products and shorter duration insurance liabilities plus any partial liability matching or dynamic hedging on longer duration liabilities may be wearing a large capital loss (which goes through P&L and to an indeterminate degree cash flow statement).

The above is making up negative scenario so not prediction.

About 9 mths ago I had a pop at analysing Standard Life Aberdeen (LON:SLA) to see if there was a mispricing due to transition from hybrid insurer and investment manager to global investment manager. I gave up quite quickly when trying to work out actuarial liabilities and gains related to insurance book that had been sold on.

I have zero forecast negative or positive on these stocks but interested in explanations either way.

(I did start out in the City as an actuary so have some understanding although switched course after a few years from liability to asset side when actuarial 'science' was just a bit too dull and arcane IMO)

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cmpeckham Wed 2:13pm 17 of 31

I hold Legal & General (LON:LGEN) and Aviva (LON:AV.) but I can see big risks in both.

It is not a question of refinancing liabilities. Their only meaningful liabilities are policies such as annuities and life assurance. Yes these liabilities are enormous but they don't have to be refinanced, they have to be paid out. The question is, will they have the assets to do this and leave something over for shareholders?

In the old days it was easy for them. Each year brought a new wave of demand for annuities mandated by law. They matched these up with govt bonds yielding 10% and hey presto, easy money. Now they don't have enough demand for annuities so they have to go out and find other liabilities e.g. pension transfer. They then match these up with ...... what? A govt bond with negative yield? How will that work? Yikes!

So the likes of LGEN have moved in to riskier areas (house building!) in search of higher returns. The issue here is what happens when the assets turn bad? LGEN have about £500 billion of assets and £9 billion of book value. So if their assets decrease in value by 2%, they are insolvent.

I'm not saying this is about to happen, far from it, but it gives some perspective. LGEN is a far more cyclical business tied to the fortunes of the UK economy than it used to be (AV is a bit different) so it is no surprise to see the shares recover as the odds of no deal Brexit have receded somewhat.

When you are talking about large companies, they are not overlooked by the market. So if they are cheap, they are cheap for a reason. No one on this board, including myself, will have the capacity to analyse these stocks to the depth that Mr Market does.

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mojomogoz Wed 2:28pm 18 of 31

In reply to post #512126

The policies are liabilities that need to be honoured. If they have a shortfall in their ability to pay what's due they will need to find the money from somewhere....ergo issuing equity to make good the gap in their cash (of course they can also increase costs for new policies etc)

I'm not convinced there is a good market in professional opinion about risk these sort of complex financial companies are exposed to unlike say Next (LON:NXT) where many have the capability to take an informed view.

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cmpeckham Wed 2:46pm 19 of 31

In reply to post #512131

Agreed the policies have to be honoured, hence the risks I discussed in my comment. Just to be clear, my comment about refinancing liabilities was in response to a comment above which said:

"The valuation rests squarely on their ability to refinance their enormous liabilities.

With rates so low, maybe they will but revenue is also shrinking as a result of yields.

Same situation with banks e.g. Barclays."

I was trying to explain that this isn't true and seems to be based on a misunderstanding.

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hawkipa Wed 3:13pm 20 of 31

In reply to post #512126


You also have to weigh into the calculation the longevity risk and the capital amount of the asset for which a return is implicit in the annuity pricing. Everyone knows those calculations are only best guesses. However, this need to best guess is the real risk and I do know how much work is put into that issue. As longevity is falling at the moment that is a risk that is going their way, but I remain of the view that there is no complacency to the very real risks faced in a low yield environment.

Pension transfer is a great business for these insurers and whilst competition is increasing, the risks are manageable and quantifiable as the seller has to price it to be fully funded at transfer.

The move into buy to rent is not a step beyond expectation as it provides an asset for which they can price risk, which is an extension what they already do. Their growth has enabled them to expand into more diverse asset classes.

I have no ability to analyse these very many risks, but having met and in some cases worked with those that do, I have faith in their abilities and integrity towards the work they undertake.


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Effortless Cool Wed 3:18pm 21 of 31

In reply to post #512126

"So the likes of LGEN have moved in to riskier areas (house building!) in search of higher returns. The issue here is what happens when the assets turn bad? LGEN have about £500 billion of assets and £9 billion of book value. So if their assets decrease in value by 2%, they are insolvent".

This is simply wrong. The vast majority of Legal & General (LON:LGEN) assets are financial investments relating to non-participating contracts. If these assets go down 2%, then the corresponding liabilities also go down 2% and book value does not change.

Under Solvency II, Legal & General (LON:LGEN) needs to be capitalised to a minimum 1-in-250 likelihood of insolvency in any given year (it will hold much more capital than this minimum requirement in practice).  A 2% drop in the value of their assets is clearly very much more likely than 1-in-250.

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ken mitchell Wed 3:48pm 22 of 31

In reply to post #511971


Was it this post?

All the shares in that post are higher, sometimes only thanks to sudden big gains this week. That’s the thing about buying bombed out good quality shares. They could languish for months more, but when they turn the gains can be fast.

Also it’s those initial gains,often a quick 30% or so, that are the easy ones to achieve. Buying after them increases the risks AND means a lower dividend yield. When I did that post a lot of bad news was priced in, including a chaotic nodeal Breixit outcome. Now the downside short term is higher than it was then, and though rewards longer term could be impressive, those easy gains are there already for some of the shares in that post, and many others that weren’t.

E.g I also hold Hammerson and averaged down at 204p aroundthe time of that post.Now Hammerson is up around 35% in no time AND they have also gone ex a 5% dividend.

Aviva at 391p and LGEN 246p are both up 10%ish and Aviva went even lower for a while.

ITV has jumped nearly 25% from 104p to 125p.

GALLIFORD helped by Bovis merger news this week is up 25%. Results today were unimpressive so downside risk if Bovis merger talks come to nowt. Even so and despite a cut the dividend is still around 8% and it was 10% at that August 555p share price.

New River Retail hit hard by Woodford forced sales is up 15% from 154p to 178p.

CENKOS report on the 19th. They’ve been winning more business so just might surprise on the upside. Share up a bit from 40p to 44p.

BT went a bit lower and until today was below the price in that post. A dividend cut might be seen as good news as it would provide £500 million or so extra for 5G investment.

BUT not sure about giving up on smaller companies and good quality AIM shares? I like those too and avidly read the excellent daily updates from Paul and Graham for possible buys.

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cmpeckham Wed 4:28pm 23 of 31

In reply to post #512151


I don't want to make an argument about this, I was only trying to fill in some blanks from some of the earlier comments, but:

- You say the vast majority of assets relate to non-participating contracts. In a non-participating contract the payout is fixed. The beneficiary does not participate in the performance of the assets. So LGEN's liabailities are fixed and do not reduce if the matched assets reduce in the way that you claim.

- I couldn't tell you what mix of contracts LGEN has (along with all the annuities etc) but the point remains that they are highly leveraged to the performance of their assets and those are mostly UK based assets.

- Solvency II is based on 1-in-200 year events, not 1-in-250 (actually a 99.5% chance of meeting claims over the next 12 months)

- If you look back over the last 50 years at the number of 1 in a thousand/million year events that have happened in financial markets, then it is clear that the industry has no real idea what a 1-in-200 year event really is because negative events are not independent. We saw how such models fell apart in 2008.

- To take one example, what are the odds of a hard-left Labour govt? Will it implement some of the wilder policies that have been mooted? What value in LGEN assets after that?

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RichardK Wed 4:52pm 24 of 31

In reply to post #512161

Yes, Ken, it was your post. Thanks for sending the link so I can thank you directly now.


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Thornabian Wed 4:56pm 25 of 31

In reply to post #512141

Let me clarify my point as I wrote this in a rush, Aviva's liabilities are very long duration due to the nature of pensions, this means with rates falling, their net interest margin (NIM) is decreasing unless they take on even more duration on their assets.  This is a real problem for insurers and why L&G have gone into property (even an empty property is better than negative rates or being pulled shorter duration).

However, on top, this doesn't just refer to their ALM management (£12.8bn policy liabilities), it also refers to their £7bn issued debt.  However, as I said, this is less of a problem.

Additionally, the below comment wouldn't occur because their assets are generally matched to be correlated to liabilities (except for duration to produce NIM).  This is why they aren't insolvent by just an asset decrease.

"LGEN have about £500 billion of assets and £9 billion of book value. So
if their assets decrease in value by 2%, they are insolvent."

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Paul Scott Wed 8:11pm 26 of 31

In reply to post #512116

Hi Graham,

M Winkworth (LON:WINK) Interims appear steady, slightly down on last year.

I had a very quick look at Winkworth's figures this morning, but decided not to report on it in the end, as it's so tiny.

I very much welcome when subscribers want to comment on results here in the comments section, so please feel free to do your own synopsis whenever you like.

Typically I'll only have time & mental capacity to look into maybe 4-5 companies each day. So subscriber comments on more peripheral stuff is highly welcomed!

It's a team sport, after all. Some of the best ideas come here from the reader comments.

Best wishes, Paul.

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Paul Scott Wed 11:41pm 27 of 31

I don't know anything about medical insurance policies. However, I do think that the insurance companies that are underwriting them, could be bust, long term.

Why? A friend has paid something like £200 per month for years into a policy. His Mum recently fell ill. The NHS did a good job dealing with the emergency, then he moved her to a private hospital in London, at a cost of £6k <b>per day</b> to recover - funded by the insurance policy.

Anyone who is funding the liabilities side of medical policies, looks to me like a fool.

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jwebster Thu 5:37am 28 of 31

In reply to post #512236

M Winkworth (LON:WINK)

Had a brief look at Wink last month, given it was so cheap with a high dividend. Not gone through yesterday's results other than read Chairman's statement.

Buy case:
Cheap, high dividend, net cash on balance sheet
Insiders own 47%
Small real estate firms in the UK going bust, some low hanging fruit for Wink to pick up
Property market transaction in a cyclical low, due to Brexit and the removal of property investor income expense tax relief, but the market will eventually come back and revenue will jump up
Revenue hit by tenant fee ban, but landlords will eventually build this into rents, so it will wash
Good history of returning cash to shareholders

Sell case:
Eventually, all this activity should be (mostly) on-line, or perhaps more likely, Wink's growth is stifled as marginal business goes to on-line entrants

Probably in the round the bulls have it, but I personally prefer companies with higher growth potential, but as a value bounce on a property market revival, Wink could rerate nicely.

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jwebster Thu 5:44am 29 of 31

In reply to post #512211

Yes, that's the issue, can they fund those long term liabilities

I too looked at Aviva but stopped when I saw the BBB bonds on the asset side. Good luck with those.

No question the 9% dividend is stellar, but I would have to spend days drilling through the balance sheet to get a grip on asset - liability matching, including duration, in a global interest-rate declining world. That's even if the data is there in the public forum in sufficient detail.

Analysts have already done the hard work for broker reports ?  Institutions would not buy without a view on this.

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Brookeda Thu 7:53am 30 of 31

In reply to post #512161

I personally don't care whether it's AIM, FTSE, DAX, DOW or whatever, The critical thing is whether you feel the company is in a position to give you above average gains in the period you are interested in investing for. Nothing else matters really.

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millen Thu 9:26pm 31 of 31

I see Best Of The Best (LON:BOTB) has a front page advertorial on PH today (blokes' version of Mums' Net) - that must be worth a huge number of clicks

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

About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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