Small Cap Value Report - Wed 14 Mar 2018 - CVR, SOM, EMR

Wednesday, Mar 14 2018 by

Good morning, it's Paul here.

Conviviality (LON:CVR)

Share price: Suspended (at 101p)
No. shares: 183.3m
Market cap: £185.1m

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

Suspension of shares & further update

There is more disastrous news today for shareholders in this distributor of mainly alcoholic drinks. I bought some yesterday, unfortunately, after being reassured by a broker note saying that the situation re bank covenants was alright. In fairness, the broker can only report what the company tells him. So if the company doesn't know what's going on, then nor will the broker's analyst.

Director buys - the Directors genuinely didn't seem to know that trouble was brewing. This is evidenced by 5 Directors collectively spending about £583k buying shares at around 300p on 5 Feb 2018 - that's only just over 5 weeks ago. Since then the share price has dropped by two-thirds, and will probably drop considerably more when it returns from suspension.

The share has been "temporarily" suspended. An announcement came out at 09:55 today;

Further Update

Further to the announcements made by Conviviality Plc on 8 March 2018 and 13 March 2018, the Company yesterday identified a payment due to HM Revenue & Customs of approximately 30.0 million which falls due for payment on 29 March 2018 and which has not been accrued for within its short term cash flow projections.

This has created a short term funding requirement.

What can I say? It's total incompetence. The finance department at CVR seems to have lost control of the budgeting process, and now cashflow management as well. Heads will need to roll - I think the CEO has to go, once this funding crisis has been resolved. The FD is relatively new, having joined CVR on 30 Oct 2017. In my view that is plenty of time to have got the budgeting & cashflow processes under proper control. So in my view, serious question marks hang over the new FD's competence too.

Trading could be adversely affected by this funding crisis;

The Company's announcement on 13 March 2018 confirmed an expected range of adjusted EBITDA of between 55.3 million and 56.4 million.

To the extent that the current situation creates operational difficulties, this may negatively impact the adjusted EBITDA range.

So clearly…

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Conviviality Plc is a United Kingdom-based distributor of drinks and impulse products serving consumers through its franchised retail outlets or through hospitality and food service. The Company's activities consist of the wholesale and retail distribution of beers, wines, spirits, tobacco, grocery and confectionery within the United Kingdom to the on-trade and off-trade market. Its Conviviality Direct is an independent wholesaler to the on-trade, serving over 23,000 outlets from hotel chains to food-led pubs. Its Conviviality Direct brand includes Walker & Wodehouse, Catalyst PLB, Peppermint Events and Elastic. Walker & Wodehouse focuses on supplying wine merchants and regional wholesalers with products and producers as part of wine portfolio. Catalyst PLB brand is the agency brand and supply solutions division. Peppermint Events delivers event concepts and bars at outdoor events. Elastic is a brand activation agency that provides support and insight to the Company's supply base. more »

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Somero Enterprises, Inc. is a manufacturer of laser-guided equipment. The Company's equipment automates the process of spreading and leveling volumes of concrete for commercial flooring and other horizontal surfaces, such as paved parking lots in North America. The Company's products include S-22E, S-15R, S-15M, STS-11M, S-840, S-485, CopperHead XD 3.0, Mini Screed C, PowerRake 3.0, 3-D Profiler and SiteShape. Its Somero Floor Levelness System monitors Laser Screed performance, operator performance and reports alert percentages of issues. The Somero SiteShape System allows for grade shaping automatically using users' motor grader, dozer or other grading machine. The Somero 3-D Profiler System allows automatic paving of contoured sites using a Somero Laser Screed equipment. The CopperHead XD machine encounters applications, such as chaired rebar, low slump and poor subgrades. The Somero eXtreme Platform (SXP) allows users use their Laser Screed equipment. more »

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Empresaria Group plc is a United Kingdom-based international specialist staffing company. The Company's principal activity is the provision of staffing and recruitment services. The Company is organized across three regions: UK, Continental Europe and Rest of the World and operates across seven key sectors. The Company targets a balanced and diversified spread of operations across its regions and sectors. The Company also targets professional and specialist job levels where its brands can offer value added services to clients. The Company has three main service lines, temporary recruitment, permanent recruitment and offshore recruitment services. The Company’s offshore recruitment services represents a range of different recruitment services and provides training services in South East Asia. The Company's brands include Alternattiva, Ball and Hoolahan, Become, FastTrack and Greycoat. It has operations in 21 countries. more »

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

92 Comments on this Article show/hide all

xcity 14th Mar '18 73 of 92

I can understand buying some Conviviality (LON:CVR). I nearly did myself when it was mentioned here that the price had dropped to 99p. Missed that though, and declined to buy at 105p. I would probably have come out OK, looking at subsequent price movements as I would have been happy with a 5% profit and very happy at 10%.
And that was despite my knowing that it was a poor quality business that should carry a low rating (growth by a series of acquisitions, low margins, stretched balance sheet in a generally lowly rated sector), I anticipated that day trading should be OK and really had not anticipated the rapid series of announcements in trading hours.

I see many people assuming incompetence in management. Many managers are certainly incompetent, and I have known more than a few CEOs who would struggle to find their way around a set of accounts.
BUT, most have a reasonable memory and can spot discrepancies in a series of figures.
Of course, the CFO is relatively new. BUT he certainly had time to dig through the bones of the accounts and even a cursory glance should have shown a £30M tax payment due.
We know they both genuinely believed that things were not too bad and that there was just a small error - else they would not have made announcements saying that this was the extent of the problem.
For me, this suggests the possibility of holes have developed and been hidden over time, and were only discovered when the finance people started digging deep. This would suggest the f**** word, though there might be other explanations.
If I have to chose between hypothesis 1 (total incompetence of both CEO and CFO, neither of whom had previously given that impression) or hypothesis 2 (some variant of f****), then 2 seems the more likely.
And that could easily mean no money left for shareholders at all.

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the0ni0nking 14th Mar '18 74 of 92

In reply to post #338498

You are correct leoleo73 - thank-you for pointing that out as I just read it and probably assumed it was VAT immediately when that is not stated by the company - I made that assertion on the basis that I expected that was the most likely tax that HMRC would require payment of which the company could have overlooked when completing its cashflow forecast the day before! CT payments are clearly defined and ER tax/NI payments are under RTI.

In reality, it doesn't matter which tax it is, (I'd still err on the side of VAT ahead of CT and then PAYE), the fact it was not captured in their cash flow forecasts is the key issue - it shows an awful lack of integration around systems etc which has clearly been exacerbated by a poorly managed finance function - which the FD appointed in Oct last year has singularly failed to improve.

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Paul Scott 14th Mar '18 75 of 92

In reply to post #338743

Hi Tanglands,

Thanks!  I've had so many disasters in my investing career, some absolutely horrific disasters, that the Conviviality (LON:CVR) situation is a walk in the park!  ;-)

More seriously though, I do think it's important to train myself to just accept that every now and then, a profit warning will hit me. It's unavoidable in what we do, especially if you have 40-50 small caps in your portfolio, as I do. You just have to accept that £x of your money has gone, and gone for good, and there's nothing you can do about it.

Therefore, when I am hit with a profit warning, I make an effort to get over the emotional response in minutes, not hours or days. The best way of doing this, is actually poring over the detail, and writing a report on it! As that helps you collect your thoughts, and make a rational decision. Plus discussing it with other (sensible) people is also worthwhile, as they will often come up with points I hand't necessarily thought of. Together, therefore, we can usually figure out what's going on.

Plus I'm making good money on French Connection (LON:FCCN) and GAME Digital (LON:GMD) this week, which has more than offset even a potential 100% loss on Conviviality (LON:CVR) - the worst case scenario. I don't think that's likely though.  In my view the bank would probably be supportive, on condition that the company does a quick placing.  Speed is of the essence though, so I hope they get their act together in the next few days.

If CVR does survive (which personally I think it will), then we'll probably have another profit warning, saying that trading was disrupted by this financial crisis.

Underneath though, it's not a bad group of companies. Just needs better management! (and a bigger overdraft).

Regards, Paul.

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xcity 15th Mar '18 76 of 92

In reply to post #338508

That's exactly my point!!!

If that was exactly your point, why did your post imply it was a negative thing?

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iwright7 15th Mar '18 77 of 92

In reply to post #338683


I too learnt the hard way from the "no, I will wait for it to come down", thought process.

Coincidentally last night I re-read the chapter of a rare interview with the US momentum investor Richard Driehaus, in Investment Gurus.  The book is now 20 years old and reported that Driehaus's small cap fund had averaged 28%/annum compound in the previous 10 years - Impressive stuff!    

Of particular note ...Several recurring themes with our day with Richard Driehaus provide very valuable clues to his success. Remember how often the phase "Positive earnings surprise" reoccurred in our conversation?  This is clearly the single most important criterion that he looks for.

 In relation to share price direction Driehaus is quoted; "See, one of the most important things we want is to buy stock going... up"!

More about the reclusive RD in an old investment magazine article here;

Burford Capital (LON:BUR) is a case in point - Would that there are a lot more!   Ian

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Beginner 15th Mar '18 78 of 92

In reply to post #338843

Apologies. I am confused. Are you saying a balance sheet that is full on the positive side only of goodwill is a good thing?

Have you looked at Braemar Shipping Services (LON:BMS) ?
Sorry if this seems abrupt. I am genuinely confused and need to get back to work.

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Bonitabeach 15th Mar '18 79 of 92

In reply to post #338733

Hi Howard,

Re: Conviviality (LON:CVR)

This is a bit of an academic exercise for me because I don't hold any shares and don't rate the business at all. Their "Bargain Booze" outlets are a visible blight on back streets concentrated in the poorer parts of the UK. The management had much higher aspirations from these mean origins but has spectacularly failed.

"* there are few Tangible Fixed Assets for the Banks to grab on to"

All the bank funding, term loans and invoice discounting is secured. The banks' secuirity is primarily cash bank balances (if any) and the trade receivables (£184m at April 2017). It is the unsecured creditors who will suffer in an administration.

Mr Banker will be stroking his chin and looking at two dates: 23 March, quarter day for rent payments. I do not know how much this will be but Conviviality operate a lot of premises with some of them franchise operations. The second date is the 30 March; £30M due to HMRC.

Will Mr Banker want to see his security diminished and exposure increased by these two events or should he get in first? I don't know the answer; but here is a business with no credible management for the bankers to engage with.

One other aspect came to light when looking at this business: the 2017 Annual Report needed 11 pages to report all the various schemes and wrinkles the Remmuneration Committee had devised to reward the management!

I do sympathise with employees and shareholders caught up in this - due diligence doesn't work when the numbers aren't the numbers.

As always DYOR.


No position.

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john652 15th Mar '18 80 of 92

Hi Paul, thanks on empresaria , I’m in two minds too, sentiment is against staffing companies but they seem too cheap, they also have a very motivated staff with I think 56 managers holding equity, largely from acquisitions, they tend to let the owners continue to run the acquisition and incentivise heavily, p/e 7 hmm

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Julianh 15th Mar '18 81 of 92

In reply to post #338628

It's not surprising that Burford Capital (LON:BUR) is difficult to value. Burford Capital (LON:BUR) don't sell anything. There are no consistent revenue streams. They are essentially gamblers betting on the results of court cases and on the ability of winners in court cases to recover their winnings. But, Burford Capital (LON:BUR) are gamblers with quite a few advantages:
1. there are few competitors
2. legal claims are very expensive. Many organisations that wish to pursue claims are short of the funding needed to do so
3. Burford Capital (LON:BUR) have specialist expertise in assessing legal claims. If their expertise is good they should win more often than they lose (at least on a risk / reward adjusted basis)
In effect we are investing in highly experienced gamblers who know the form on most of the horses and can get very good odds because the bookies need their bets
Disclosure - I have held for several years, Burford Capital (LON:BUR) is one of my largest holdings but I have no idea how to value the business apart from

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hbeaver 15th Mar '18 82 of 92

In reply to post #339033

I have followed your comments on Somero for some time & am thinking of buying. I notice that you state that the dividends are in U.S. Cents & wonder if these are paid in U.S. Currency or Sterling as I have had difficult in cashing foreign cheques iin the past.
Many thanks for your excellent summaries of different companies.

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xcity 15th Mar '18 83 of 92

In reply to post #338923

No. It is neither good nor bad. It doesn't exist. It is a balancing item.
That's why we look at NTAV rather than NAV.
Braemar Shipping Services (LON:BMS) is not an asset rich company, but does have quite a strong balance sheet.

Goodwill comes with takeovers, when the amount paid for a company exceeds the value of the assets being taken over. In BMS case, the last big jump came with the takeover/merger with ACM.

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stepone 15th Mar '18 84 of 92

In reply to post #339068

re. Somero dividends, these will be paid into your broker account in pounds. But they will have 30% withholding tax deducted if your broker uses CREST (e.g. Halifax, iWeb), irrespective of whether you fill out a W8-BEN.

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rhomboid1 15th Mar '18 85 of 92

In reply to post #339173

..but paid without any deduction if you use AJ Bell youinvest or Hargreaves Lansdowne as they settle differently ie they use intessa rather than CREST

Not sure why but there you go

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alterego 15th Mar '18 86 of 92

re Burford Capital (LON:BUR)
it is a shame that comments about this company appear here on a thread that specifically does not cover BUR. There is an alternative here which makes it clear that it is devoted to BUR. I'm interested in what others have to say so can I respectfully suggest that we all use a thread devoted to BUR?

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herbie47 15th Mar '18 87 of 92

In reply to post #339173

Not true, I only pay 15% tax with HL and I need a completed W8-BEN before I can deal.

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stepone 15th Mar '18 88 of 92

In reply to post #339368

It is true. HL don't use Crest which is why they are able to reduce the tax. But if your broker uses Crest they cannot. I have pursued this with iWeb and been told there is nothing they can do about it.

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herbie47 15th Mar '18 89 of 92

In reply to post #339373

I see. Yes I know some people have had trouble trading this share with some brokers and also reclaiming the tax. HL seems pretty good in handling foreign shares.

What does HL use then? I'm reading they use Crest.

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stepone 15th Mar '18 90 of 92

In reply to post #339393

Think it's called Inesta - see details in Rhomboid's post above.

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gus 1065 16th Mar '18 91 of 92

Update released by Conviviality (LON:CVR) this morning. Glad that’s all been sorted out (ironic comment - don’t think it really adds anything). Text below:-


Conviviality Plc

(the "Company")

Further Update

Further to the update announcement on 14 March 2018, the Company has been actively engaging with its stakeholders while it continues to work through its funding requirements:

· Customers and suppliers remain supportive of the Company and are working closely and constructively with the Company at this time;

· We have had constructive discussions with our lenders which are on-going;

· PwC are undertaking a review of the business and its future finding requirements and this work stream is progressing well;

· The Company has engaged with HM Revenues and Customs ("HMRC") regarding the £30.0 million payment due on the 29 March 2018. HMRC has been receptive to our needs and these discussions continue; and

· The Company is engaging with its advisers and broker regarding the possibility of an equity fundraise to effect a recapitalisation of the business.

The Board wishes to express its gratitude to all its stakeholders for their on-going support during this difficult period for the Company.

A further update will be provided in due course.

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gus 1065 29th Mar '18 92 of 92

In reply to post #338133

Just wondering if anyone has an insight as to why Sportech (LON:SPO) is up about 28% today? Since the ugly profit warning and 50% fall from grace earlier this month the shares have been quite perky. No obvious news; suggestion on a couple of BB’s that the relaxation of the US betting regulations might be imminent.


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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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