Small Cap Value Report (Wed 17 May 2017) - CAKE, FOXT, ALT, ZTF, IDEA

Wednesday, May 17 2017 by

Good morning, it's Paul here.

I updated yesterday's report with a few more sections later in the day. To see the full report, please click here. It includes my comments on;

K3 Business Technology (LON:KBT) - profit warning (looks nasty)

Accrol Group (LON:ACRL) - in line trading update

Zytronic (LON:ZYT) - decent interim results & outlook

Interquest (LON:ITQ) - lowball bid from management - company now in play

Koovs (LON:KOOV) - RNS saying no reason why share price is falling (other than that the company needs to raise more funding)

On to today, I've included in the header the companies which I intend reporting on.

Patisserie Holdings (LON:CAKE)

Share price: 333p (up 4.1% today)
No. shares: 100.0m
Market cap: £333.0m

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

Interim results - for the 6 months ended 31 Mar 2017.

This group's main operations are the chain of "Patisserie Valerie" cake & tea/coffee shops. It's a roll out share - i.e. the company is expanding (opening around 20 new sites each year) funded from its own cashflow.

If you look at the Stockopedia historical graphs, you can see why this is one of my favourite shares - with revenue & profits growing in diagonal lines - steady, predictable growth. With no debt.


Remember that the net profit figures shown on Stockopedia are post-tax. So you can ascertain by comparing graph 2 (net profit) with graph 1 (revenues) just how strong (and consistently good) the net profit margin is at this company. 

Profit growth is all well and good, but if the company is constantly issuing new shares to finance growth, then the benefit to EPS can be small. Not so in this case - as you can see from graph 3, with terrific EPS growth over the last 6 years.

Graph 4 shows us that the stock has never really been cheap - hardly surprising, given how well it's performing. So I would tend to see…

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Patisserie Holdings PLC is a United Kingdom-based cafe and casual dining company. The Company offers cakes, pastries, snacks, meals, and hot and cold drinks across the United Kingdom. The Company's segments include Druckers, Flour Power and Philpotts. It offers products, such as coffee, dairy, fruit, packaging, cocoa and wheat items. It offers cakes in various categories, including celebration cakes, gluten free cakes and wedding cakes. The Company operates under various brands, including Druckers-Vienna Patisserie, Philpotts and Flour Power City Bakery. The Company offers a range of cakes, such as Gluten Free Flapjack, Gluten Free Chocolate Chip Muffin, Cortina, Chocolate Box, Carrot Cake, Cheesecake, Blackforest, Exotic Fruit Tart, Pecan Tart, Citron Tart, Choc Mousse, Mixed Berry Mousse, Raspberry Tart, Madame Valerie Slice, Mille-Feuille, Gluten Free Chocolate Brownie and Gluten Free Marble Cake. more »

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Foxtons Group plc is a United Kingdom-based company, which operates as an estate agent. The Company and its subsidiaries are engaged in the provision of services to the residential property market in the United Kingdom. It operates through three segments: Sales, Lettings and Mortgage Broking. The Sales segment generates commission on sales of residential property. The Lettings segment earns fees from the letting and management of residential properties and income from interest earned on tenants' deposits. The Mortgage Broking segment receives commission from the arrangement of mortgages and related products under contracts with financial service providers and receives administration fees from clients. The Company offers its residential property sales and lettings services through its network of approximately 60 branches. It offers independent mortgage advice and other related services through Alexander Hall. It offers corporate services, property management and other services. more »

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Altitude Group plc is a technology and information business providing services to the promotional merchandising and print industries across North America and the United Kingdom. The Company operates through Technology & Information segment that enables the buyers and sellers of products to interact and trade, through the provision of technology, catalogues and exhibition services, in the promotional merchandising and printing sectors. The Company provides technology services, specializing in cloud and server based software. Its Technologo offers a range of interactive image solutions, which are used for increasing engagement from online business-to-business (B2B) and business-to-consumer (B2C) buyers, and reduced cart abandonment rates. It also provides a Website solution for companies in the promotional product industry. It publishes catalogues annually for the promotional products industry, which include Spectrum and Envoy. It also hosts the Promotional Product Roadshows. more »

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

36 Comments on this Article show/hide all

BlueFrew 17th May '17 17 of 36

As far as Foxtons (LON:FOXT) and other estate agents are concerned, if the next Government bring about a ban on charging tenant fees, other than a deposit and rent, then that will really hurt their lettings income.

I'm certain that these charges have absolutely no relation to how much it costs to carry out tasks. So I'd expect the costs to be drastically reduced as the costs are passed to the Landlords, who can shop around, and away from tenants, who have far fewer options. Not only that, it would remove a significant cost of moving. What is the point of spending several hundred pounds in fees to save say £25 or £50 a month in rent? I'd expect rents to fall in that situation and put further pressure on their fee income.

I have no current position in Foxtons (LON:FOXT) , but I'm keeping it on the watchlist as a potential short. It really depends on what the next Government does to tenant fees.

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dscollard 17th May '17 18 of 36

I like your long Purplebricks (LON:PURP), Short Foxtons (LON:FOXT) .. a new form of option structure: the Scott Collar

NCC (LON:NCC) catching a bid today up almost 10% possibly on the back of the boost in Sophos (LON:SOPH) which is up on good earnings and the whole Cry me a River (of money) ransomware

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bestace 17th May '17 19 of 36

In reply to post #185438

Your comments on the importance of LFLs represent the consensus view and up to a point I think that view has some merit, but there is a counterview:

Most people here will be familiar with the old refrain about revenue being vanity, profits being sanity and cash flow being reality. In other words what matters most to investors is not so much top line growth or LFLs, but overall profitability (i.e. the bottom line) and cash flow.

Focusing on top line growth and LFLs can lead to perverse actions such as discounting to boost sales at the expense of gross margin and overall profitability. Furthermore weak LFLs may be a symptom of a broken business model, but it does not necessarily follow that just because LFLs are weak, the business model is broken or that existing stores are underperforming.

For example if weak LFLs are due to increased competition and if you're one of the stronger players in the marketplace, you might want to increase the pace of the rollout to put pressure on your competitors. Pausing and waiting for the trading environment to improve, or trying to fix something which isn't actually broken might be missing an opportunity.

In the case of Patisserie Holdings (LON:CAKE), clearly the business model is not broken and I think focusing on this comment in the Patisserie Holdings (LON:CAKE) presentation is more important than speculating on whether their LFLs are weak:

All stores now deliver positive contributions; 60% generate £100k EBITDA

The 'now' in that comment might imply it hasn't always been the case that all stores have been profitable, but they have included the exact same statement in every 6-monthly update since they listed. The time to start asking questions about possible under-performance will be if they ever remove this statement from their updates.

On low cost gyms, I don't think you are drawing a comparison between that sector and Patisserie Holdings (LON:CAKE), but it's worth remembering that CAKE requires little capital to expand, their stores are profitable from day 1 and their payback period for each store is very low. None of those features apply to low cost gyms, so in the case of CAKE I'd suggest pushing ahead with the rollout is the right strategy even if LFLs are weak (not that I accept that they actually are weak).

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fredericktug 17th May '17 20 of 36

In reply to post #185468

Hi BH1991,

You are right to sound the bargepole warning on Cyan. However, I once held a stock that I bought at floation (back then it was on the old OFEX market). For years it was a one product-serial-not quite there-kind of stock. Until one day, it wasn't. And it's ahare price went from the mid teens right up to about £3.50. It's now around the £2 mark. It's been my only serious 20-bagger where I was thankfully in there in volume. It's name - Sprue Aegis plc. And it yields for me a dividend (at my 20p average entry price) of 40%!.

Not bad if you can find them?

I agree you have to have a strict bargepole policy and this could well be one of them. I for one am NOT convinced by Cyan at the moment, but it is firmly on my watchlist for sustainable green shoots, and even then, I would only dabble. Trouble is, you can then miss the biggest part of any re-rating.

I feel the same way about Redstoneconnect BTW, but I have only picked up a tiny opening position.


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WhaleHQ 17th May '17 21 of 36

In reply to post #185368

Correlates. Interesting to note that MAB are chasing a more premium experience for their customers in order to mitigate growing costs. This bodes well for RBG as they are the definition of premium experience.

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BahrainChris 17th May '17 22 of 36

I live and work in Central London and concur with Paul's thoughts about Foxtons (LON:FOXT)

I have never heard a good word said about then.

In recent months our Young Engineers Network (essentially a drinking club but also used to welcome new graduates to our employer and London) have actively been steering people away from them for lettings.

I have no personal experience of them but this doesn't sound good.

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haroldthegreat 17th May '17 23 of 36

In reply to post #185388

No it doesn't really matter but it is rare not to report it .one has to assume that as it isn't reported the figures are static or negative. Surprised Paul did not comment on it
.I think the company is well run and worth investing in. Going into supermarkets is a good idea as relatively low cost and increases exposure to a sector of the population that might not go to their outlets.

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Beginner 17th May '17 24 of 36

In reply to post #185473

Regarding the government threat to limit charges on tenants, I think it was Belvoir Lettings (LON:BLV) that put out a statement that similar legislation in Scotland some years back had no real impact on agents' profits, and perhaps M Winkworth (LON:WINK) that suggested that they might take a 9% hit. I think Property Franchise (LON:TPFG) also had a largely dismissive response. Of more relevance to Foxtons (LON:FOXT) is a possible cooling in the London market. I live in the grim north so have little to say on the latter. For those looking for yield, estate agents seem to me to be a reasonable repository for their money at the moment, but future growth prospects seem limited.

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Lennart 17th May '17 26 of 36

Foxton is an estate agent I found arrogant and rude. I would never approach them again.


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jonesj 17th May '17 27 of 36

In reply to post #185438

The gyms analogy is one to mull over. As you say, a well known listed gym company does not talk about LFL sales. As I pointed out in January, one of them didn't have significant LFL sales growth based on sales v number of sites (Revenue: +22.6%, members + 19% & number of gyms +20%). There are also several competitors rolling out gyms & when I look through the windows, lots of empty running machines.

Moving back onto Patisserie Valerie, well Paul's pitch has my interest. It's about time I actually visited the local branch, so I can understand how it is differentiated from Costa, Starbucks, Nero, Pret a Manger etc.
At one end of the market we see Greggs has moved from a bread shop to fast food & serving in shop coffee, although quite a low end offering.  Service is also sadly lacking.
Then I notice Costa & Starbucks are broadening their food offering, so I suppose it is necessary to work out what differentiates CAKE & whether that difference will remain in place.

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WhaleHQ 17th May '17 28 of 36

In reply to post #185523

My idea of premium experience is cira one headbut a night

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vik2001 17th May '17 29 of 36

In April, the company entered into a 12-week agreement with Sainsbury's to supply 12 nationwide stores with its product, which is being sold in-store from Patisserie Valerie branded counters at Patisserie Valerie price points.

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doug2500 17th May '17 30 of 36

Zotefoams (LON:ZTF) I'm pretty sure the 20% increase in capacity is an increase in global capacity not the companies capacity. This would put it in a commanding position. That's my understanding anyway.

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Paul Scott 17th May '17 31 of 36

In reply to post #185448


I'm not going to have time to do a write-up on Cyanconnode Holdings (LON:CYAN) . However, on a quick glances, the figures look terrible. A huge loss on, very low turnover. Very much heavy cash burning, jam tomorrow sort of thing. Not for me.

Regards, Paul.

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runthejoules 17th May '17 32 of 36

In reply to post #185468

Thanks both. No offence taken at all. I think next time they release an RNS for another deal, if the SP goes up (as it often does, for about five minutes), I will come straight out of it. But not just on your opinions but my own! Going to try to follow bargepole criteria like yours and Paul's more in future - more discipline, less optimism. Cheers!

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Paul Scott 17th May '17 33 of 36

In reply to post #185568

With jam tomorrow stocks, it's true that occasionally people hit the jackpot (especially in a bull market). However, in my experience, punting on things like CYAN is just gambling really. Unless you know the sector inside out, and are certain that you're onto a winner.

Also the jam tomorrow stocks that do zoom upwards in bull markets, often end up being worthless a few years later, once the BS unravels. I'd like to do a study of jam tomorrow stocks, and systematically plough through everything small cap & speculative that floated in the last 20 years, and see what the end result was. I bet it would be absolutely dire.

Still, that doesn't stop the spivvy rampers that try to (effectively) steal our money, from pumping crap. All they need to do, is create a nice spike, then they sell. I despise people like that, and have come across plenty in my time. They pick stocks that you can't value - so things that don't have earnings or divis. That's why it's best to avoid junk like that - a key message of this site, both the geniuses with their algorithms at Stockopedia HQ, and in my small way, with my "nose" and experience of spotting wrong 'uns like Globo, Quindell, and plenty more. Put the 2 together, and it should cover most bases at avoiding dangerous stocks. and of course the crucial DYOR bit.

Regards, Paul.

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Funderstruck 18th May '17 34 of 36

In reply to post #185538

Also saw one of these in Debenhams Oxford str last week ; was early morning so too early to judge the trade.

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Funderstruck 18th May '17 35 of 36

Whoops...The above relates to Post # 29.

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gus 1065 20th May '17 36 of 36

Slightly dated (a couple of months old) but interesting article from Phil Oakley on how he assesses roll out valuations. Comments extensively on Patisserie Holdings (LON:CAKE) as well as a couple of other stocks with topical relevance to Revolution Bars (LON:RBG) and others.

My principal takeaway from this is that timing the exit to an investment is key on the basis that as and when momentum starts to fall away there is the compounding double whammy of lower earnings and a lower market p/e rating giving a sharp decrease in share price. Sods' Law, this is often the point at which many private investors decide to climb aboard.


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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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