Small Cap Value Report (Wed 18 Dec 2019) - FRAS, SDI, TSTL, STAF, 600, GRC, MIDW, BIDS, PRES, SYM

18th Dec '19 by Paul Scott

57 comments 8662 reads

Good morning, it's Paul here!

I'm up early today, so thought I'd start with some brief comments on a couple of interesting company updates from yesterday, that Graham missed due to focusing on a macro ramble instead.

Estimated time of completion: 3pm

Update at 14:46 - today's report is now finished.

Sports Direct

Name change - it's now to be called Frasers. We saw a staggering rise in share price this week, to about 470p. That means if has more than doubled since the low of about 220p just 5 months ago. Whoever said that elephants don't gallop, was wrong!

The narrative with its interim results was interesting. A bit like Tim Martin of 'spoons, Mad Mike Ashley obviously revels in his outspoken, unorthodox way of doing things. Both are brilliant & talented entrepreneurs, so personally I think they've earned their stripes, and should continue saying whatever they like, in whatever style they like.

The one thing that does irk me, is that Ashley gave the impression from previous trading updates, that buying House of Fraser had been a terrible mistake, indeed he even referred to its problems as "terminal". Therefore, investors assumed that this was bad news for the company & its shares. Along with a catalogue of other bad buys - such as Debenhams (where he lost out to hedge funds, and has choice words to say about that too!), Goals Soccer Centres, and other sometimes rather stupid mistakes.

The latest update this week, seems to be now talking up House of Frasers somewhat, with green shoots and being integrated into the larger business, in IT, supply chain, etc. Changing the group name to "Frasers" does rather suggest that House of Fraser is now an important part of the group's future.

Narrative matters, but it's the numbers which matter more. There's an updated broker note on Research Tree, which I'm looking at, showing huge increases in forecasts - e.g. 43% increase in current year EPS, and EPS for next year going up from 19.3p to 30.3p, up 57%.

These are extraordinary forecast increases, for a mainstream retailer of this size. Therefore the dramatic re-rating in share price looks fully justified to me.

SDI (LON:SDI)

Share price: 75p (up 3% yesterday, at market close)
No. shares: 97.2m
Market cap: £72.9m

Interim results

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DWit199

18th Dec '19

Ra International (LON:RAI)

The answer to your third item is in the Interim report

... a new contract whereby we will be undertaking construction works at the US embassy in Denmark. We primarily bid on this contract to provide us with the track record and experience required to undertake similar contracts in Africa; and less than 2 months following this contract win we were awarded a similar contract in South Sudan where we have now materially increased our footprint. We are optimistic that we will win additional work in South Sudan allowing us to maintain a significant footprint in the country for years to come.

jombaston

Hansteen Holdings (LON:HSTN)

Mucklow was acquired by Londonmetric Property (LON:LMP) at 11.4% premium to NAV. So a similar sized premium for a similar-sized portfolio although this was at a 19.7% premium to the prevailing share price and arguably at a more uncertain time in May. This bid is for cash but I actually preferred the Londonmetric Property (LON:LMP) bid as it gave the option of shares in Londonmetric Property (LON:LMP) which have continued to perform. With cash, CGT is payable and the cash will have to be re-invested

rmillaree

RA International (LON:RAI)

garbetklb

They won a significant contract in Denmark with the US Embassy. How on earth are an African focused company competitive in Denmark? And why would they want to be diverted from their prime focus? Something doesn't add up

That's an excellent question to ask the company - i am guessing they aren't adverse to doing business anywhere and they have been keen to say they are looking to expand geographically and they have married up with us entities to have some sort of shared framework for completing contracts for the us government - i'm not sure if they do the bidding and subcontract or do the subcontract work for the bidder.

Note they said the following in the 2018 finals which referenced a global agreement.

Signed a Master Service Agreement with IAP Worldwide Services to provide global supply chain services. The first order is for USD 8.5m and relates to sub-Saharan Africa

Note IAP mention they work with the US government on their main webpage - so i am guessing the Denmark contract is just a consequence of signing this worldwide agreement or some other similar type opportunity - if they have the relevant technical ability to deliver to the US government in Africa sorting somethingsimilar in a European country should be simples for them. To me the more territories they deliver too the more diverse their income stream and the less likely they are to run into big problems if there major strife if one or two of their marketplaces. Obviously there is the operational danger they will move away from their core competence and take on something they shouldn't

mammyoko

Great report today, Paul. I think SDI (LON:SDI) could have further to run against a possibly increasingly supportive backdrop. I do worry about the heavy dilution here over the years but think that may be ignored in the general excitement. I could see this appealing to PE at some point

Zipmanpeter

Non-standard Finance (LON:NSF) - Alchemy Special Opportunities who bought out Woodfords share of NSF and have today increased their stake from 19.2% to 29.95% ie max possible before a mandatory takeover bid.

Share price remains 1/3 of what it was before the failed bid for PFG was launched in Feb 19. All All 3 Underlying businesses (EDL - no 1 in branch based lending, GLD - no 2 in Guarantor lending and no 3. Loans@Home are doing reasonably well IMHO ie growing reasonably fast and with low levels of impairment (for sectors) so risk-adjusted margin is >30%.

However, rate of growth has slowed as they price up ahead of any recession, have made changes in response to FCA rulings and most critically as they are start to run out of money to lend !! Alchemy is no doubt part of the answer to that. Balance sheet needs strengthening urgently to in turn enable a restructuring and expansion of loans. A Rights issue or Placing must be on the cards (esp as new broker appointed a few weeks ago!).

Question to community - do Alchemy ever own businesses outright ie is a takeover likely?

Despite the appalling share price run to date and recent profit warning (and risk of total loss if economy suddenly goes south), I would like to hold on to my stake. Current price of 20p as it is only only 0.3 xBook value (from Stockopedia today) and I think that operationally the businesses are much bigger and better than when they were acquired.

Press speculation has been that Alchemy is forcing a restructure by selling off Loans at Home. This could be an attractive purchase to Morses Club (LON:MCL) if regulators allow, giving them roughly 30% mkt share (ie +8% ppts) in Home Credit vs Provident Financial (LON:PFG) at 50% and a further source to integrate with their recent digital purchases. It could just about be a standalone operation or add on to another sub-prime specialist like Amigo Holdings (LON:AMGO) or S&u (LON:SUS)

Detaching Loans@Home would leave the EveryDay Loans national branch network and the Guarantor Lending Division, 2 businesses that would be a perfect and satisfying purchase for Provident Financial (LON:PFG) to integrate - a complete reversal of the failed takeover. With a stronger balance sheet and a 3-5 year outlook, both are great business opportunities.

I hold (too much) NSF but am consdering doubling down and buying more !!

gmtrader

Thanks Paul for the write ups. I find them very informative.

Can you have a look at STM please? It's profit making but currently has a negative EV.

Wimbledonsprinter

I agree that there are certain things that are worrying with RA International (LON:RAI) - Dwit199 has given you the company’s answer to the Danish contract - and it is fair to say that the company’s answer was similar even before the South Sudan contract - ie we went for the Danish contract because it would help us with winning embassy contracts in Africa.

I was at the last AGM (and am still a very small shareholder) and while being very personable - I am not convinced she is really ready to run the company as a public company and be fully transparent to shareholders.

The other issue with the company is that at the IPO, the rationale for raising the money (all primary shares - existing owners sold nothing) was to allow the RA International (LON:RAI) to bid for much larger projects (credibility and working capital). But since IPO, they have still not won one such contract.

ACounsell

Hi Paul,

Sadly it doesn't always follow. I had a holding in Cml Microsystems (LON:CML) which plunged after a profit warning in January 2019. As a small speculative holding in my portfolio I held on in the hope of a recovery (usually a mistake given the Stocko research on profit warning) but sold in early November at c. 306p as no improvement evident in results/trading updates. At the end of November the Group Finance Director resigned and since then the share, on no other news, has increased to c. 353p - a 15% gain. Not sure if this a one off but as you say potentially an interesting project for an intern

ken mitchell

Strongly agree with you bryans1311 about the exceptional report today, and that applies on so many days. So it took Paul at least 6 hours. Wow!

One big plus is that the depth and quality of information on the shares Paul and Graham cover is so useful when researching Stockopedia for further potential buys, so that cumulative benefit beyond the days of the reports themselves is becoming such a useful benefit too. It’s worth the subscription just for the quality of these reports and a lot of the replies, with masses more here on top, in for free. A bit like a share with cash more than covering the share price, with a good business thrown in for free.

It’s a shame that when accessing the reports on an IPad the thumbs up doesn’t work. IF there is a way to give a thumbs up on an IPad can someone please explain how?

mgschainey

Thanks for this Paul. The expiration date of warrants for 600 (LON:SIXH) is the 14th Feb 2022, so still a couple of years left of potential capped upside.

bryans1311

Also agree, particularly your second paragraph. I have a checklist for filtering and analysing companies. Reviewing historical SVCR’s is at the top of the “qualititative” section of my checklist. It’s the idiosyncratic analysis I find adds so much value to the numbers found elsewhere.

I was able to give you a thumbs up on my iPad by clicking on the “in reply to post...” part, and doing so in the pop up window. Otherwise it’s not possible using an iPad on the old site. Altogether impossible to thumbs up the SCVR at the top.

Paul Scott

Exceptional report today Paul. Both in volume and quality of coverage. Many thanks!

Thanks for your positive feedback, much appreciated :-)

Best wishes, Paul.

andrewjames

I can be accused of confirmation bias, because I am heavily invested in investing Tristel (LON:TSTL) and so watch them like a hawk and attend updates regularly.

I am very happy that they are buying out distributors as part of their global roll-out programme. It makes very good sense and hugely boosts margins. In some cases, they have supplemented the group - most obviously Bart Leemans, who is an impressive individual, now on the board.

The US initiative is clearly very important, but I think that the market generally misses the point that there are huge opportunities to grow the business pretty easily, however long the US approval programme takes. Start with France and Germany and then look at South America and the Far East. I don't share the view that the share is fully priced, but I do agree that any news that is less than wonderful may result in a price dip. That is when I will add more.

GTrader

Agree with all you have said, NSF at current levels with receivables and returns are very good value. In terms of funding they have lines out a few years as I remember the chair commenting recently on but they seem to be in a holding, wait and monitor the book before embarking on further expansion. EDL seems solid but with Amigo not in a great shape so has implications/market concerns for Trust2/Georgebanko. Also the people in every part of this business are sub prime lending ingrained right up to the Chair ex Chair of Provident. Alchemy will take the lot if they can and if lenders remain confident, no reason for them to share the pie IMO.

MichaelFBS

”The share price was 117p when Graham wrote that a year ago. It's since lost the 1 on the front of the share price, and is now 17p!”. Made me chuckle.

I think I saw somewhere that Stockopedia covers 48,000 different stocks (if you subscribe to all regions, I don’t), but if that is the case with 47,999 other possible investing candidates would anybody invest in a company like Bidstack (LON:BIDS)? I just don’t understand how the risk reward scenario could ever be favourable?

abtan

I hold Ra International (LON:RAI) and despite initial enthusiasm for this morning's update, on reflection I'm actually a little put off and am tempted to sell my entire holding.

My thought process:

Sept 2019 (H1 interims published):

H1 Rev = $23m

Backlog = $166m as of June 30th 2019

Today (trading update)

Full year revenue expectations slightly exceeded, let's assume $61m vs expectations inJuly 2019 stock report of $60.2m, and a backlog of $148m.

So $23m H1 revenue + $38m (balancing) H2 revenue = $61m revenue for the year.

Taking away 38m H2 revenue means the H1 backlog of $166m reducing to $128m, and the backlog today of $148m implies that only $20m in new orders was therefore received in 2019H2.

This seems low, especially given that $9.1m of this $20m was announced today (very close to YE!) and is vs $65.8m of orders won in H12019

The H2 order position looks even worse if using today's 2019 revenue expectations of $59.3m

Conclusion

I bought into this company in the full knowledge that orders would be lumpy but a swing in orders from $65.8m in H1 to $20m in H2 is perhaps a bit too lumpy for me.

Booked revenue for 2020 is already $55m, vs expectations of $65.2m, so that takes away some risk, but if Ra International (LON:RAI) are really not winning many orders at the moment what are the chances they'll book many orders during 2020?

I'm not sure what to do next though I'm leaning towards selling out. Thoughts from others appreciated. Am I missing something?

Cheers

19th Dec '19

Taking away 38m H2 revenue means the H1 backlog of $166m reduced to $128m
The backlog today of $148m implies that only $20m in new orders was therefore received in 2019H2.

This seems low, especially given that $9.1m of this $20m was announced today (very close to YE) and is vs $65.8m of orders won in H12019

Booked revenue for 2020 is already $55m vs expectations of $65.2m, so that takes away some risk, but if Ra International (LON:RAI) are really not winning many orders at the moment what are the chances they'll book many orders during 2020?

Gromley

Apologies for the off-topic.

- I sent you a PM a couple of days ago, but it just occurred to me that you're using the new site where private messages have not yet been implemented. Nothing earth-shattering, but it might be of vague interest - you'll need to switch back to the old site to see it.

ISAallowance

Re. RA International (LON:RAI) (I hold)

Here are what I think they have stated the contracted backlog to be on every occasion I can find that they have stated it:

31/12/2017 $112m (prev figure stated in H1'18 interims narrative)
30/08/2018 $114m (Snapshot at H1 '18 interims release date, from narrative)
31/12/2018 $119m (FY 18 figure)
10/04/2019 $130m (Snaphot at FY 18 release date, from narrative)
24/06/2019 >$150m (Trading update)
30/06/2019 $166m (H1 '19 figure)
18/12/2019 $148m (Trading update)

This appears to be the first time the stated figure has actually gone backwards. However, the longer trend still looks upward to me. Personally, I can live with lumpy, as long as the longer trend continues upward, particularly given the recent CFO purchases.

Berksbee

20th Jan '20

$tstl New to Stocko since January, but understand the analysis on TSTL. It's my largest holding and I've got my stake money back long ago. Its a stock I've held for several years so I've got to appreciate the business. It's super niche and small with a patented moat. This together puts off competitors. IMO when the US approval comes - which it will - we will see a delayed hike in sales - but more importantly some bigger players will tray and buy it.

Small Cap Value Report (Wed 18 Dec 2019) - FRAS, SDI, TSTL, STAF, 600, GRC, MIDW, BIDS, PRES, SYM

Sports Direct

SDI (LON:SDI)

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Paul Scott

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