Small Cap Value Report (Wed 21 Mar 2018) - MOSB, AIEA, LPA, CPR, MTC

20th Mar '18 by Paul Scott

43 comments 14744 reads

, MTCHi, it's Paul here.

To get you started, here is the link to yesterday's completed report, where I looked at results from Cloudcall (LON:CALL) and Blancco Technology (LON:BLTG) , plus a positive update from Pennant International (LON:PEN) .

I'm not sure about timings for Wednesday's report, as I have to hire a car first thing in the morning, and take our dogs to the other side of London to the doggie hospital, to have a few things fixed. As they'll be under general anaesthetic, I could have to hang around all day. So will take my laptop with me, and I'll try to get something posted once I find a quiet corner with a plug socket and wifi.

EDIT: Good news! The dogs survived their operations, and are recuperating well :-)

Moss Bros (LON:MOSB)

Share price: 45p (down 23.2% today)
No. shares: 100.8m
Market cap: £45.4m

Trading update (profit warning)

Moss Bros Group PLC ("the Group"), the 'first choice for men's tailoring' today issues the following Trading Update for the 52-week period from 28 January 2018 to 26 January 2019.

The first thing to note is that the current financial year has barely started, so it seems an odd time to be putting out a trading update. Particularly as full year results are due out in a week's time. So trading must have deteriorated, necessitating a profit warning.

This is clearly bad news;

Following a review of projections for the year ending 26 January 2019, the Board now anticipates that the Group will deliver profit at a level materially lower than current market expectations.

There are no changes to results for year ended 31 Jan 2018, which will be announced next week, on 27 Mar 2018.

What's gone wrong then? As you would expect, consumer confidence is mentioned for 2 of the 3 reasons given;

· Hire sales continue to be challenging, although the peak trading period for Hire is still to come. As such the Group has remained prudent in its outlook.

· The reduction in store footfall that was experienced towards the latter part of December, has continued, reflecting a more cautious consumer…

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ken mitchell

21st Mar '18

Softcat seem to be dampening expectations a bit, perhaps partly because share has had such a good run.

e.g in addition to points posted by slopsjon:-

“We will continue to monitor potential impact of Brexit process, although the Company’s focus on the U.K. domestic market means that risk from this is centred round macro economic factors which may impact customer appetite for business investment.”

Share price down over 80p just now but up over 60p yesterday.

ACounsell

Xaar (LON:XAR) share price reacted very positively (up 18% at close) to unexceptional results. Perhaps I am getting sucked into the world of conspiracy theories but why do I suspect the price has been forced down prior to the results announcement (see the chart over the last 6 weeks) enabling those 'in the know' to buy immediately prior (yesterday) to the announcement and make a tidy profit!

LeoInvestorUK

Conviviality (LON:CVR) update: https://investegate.co.uk/conviviality-plc--cvr-/rns/update-on-progress-and-potential-equity-fundraise/201803211800325212I/

EDIT:

Headline: Going to meet institutions to discuss a £125m placing. £5m open offer if successful.

Three things stood out for me.

1) They have payments overdue with their creditors and are not operating normal trading terms.

I don't see how this can have happened in the last few days and even if it has by not paying their dividend their cash position is better than expected. If they could have paid suppliers surely they would have done so to avoid default rather than saving money for the HMRC who they are certain to default with.

2) Expected adjusted EBITDA drops another £10m, if recapitalisation successful.

Detailed reasons are given, but this suggests they were hoping / expecting to push through quite a lot of lumpy earnings (like new franchises) in the last few weeks of the reporting year (ending 28th April) and this may have always been optimistic. Also some suggestion that wholesale customers have stopped purchases (whether through destocking or buying elsewhere).

3) Confirmation that if it can't raise funds then they are toast.

Clearly management were completely clueless about what was really going on, their share dealings being proof if nothing else. It seems quite likely that PwC will discover more issues.

The recapitalised CVR would have a enterprise value of £125m raised + £100m debt assuming no value for the existing equity, and EBITDA of £50m (assuming no more nasties). So looking at it simplistically, any valuation above 4.5 EV/EBITDA implies some value for existing equity, anything less implies they are bust.

Taking the best case as 8x EV/EBITDA, this imples a £175m premium. If the institutions target a 20% rise on the first day (again, optimistic), that's £25m leaving £150m for prior shareholders, only a 17% fall. That seems very unlikely.

xcity

Statement implies that profits have been overstated for some time.
If restated accounts don't come with the placing, then I'd anticipate a substantial period of even more price weakness. Any institution worth its salt would insist on seeing restated accounts before agreeing to put money in, whatever terms are offered.

sharw

Paul writes I suspect we might see a wave of CVAs amongst household name retailers this year in respect of Carpetright (LON:CPR) and now another has just been announced for New Look:

http://www.bbc.co.uk/news/busi...

Micro Focus International (LON:MCRO) - Heavy director buys today after profit warning. I mention partly because it has many of the same red flags as Conviviality (LON:CVR) - high debt to market value, losing control of business after transformational merger, heavily negative NTAV and of course the director buying. The big difference is that they seem to have no covenants, loads of cash and debt headroom, plus good gross margins.

Effortless Cool

A great write-up of Carpetright (LON:CPR) , thanks, Paul.

Edward John Canham

Conviviality (LON:CVR)

Following on from/expanding on your point two the RNS states:-

"On the 13 March 2018, Conviviality announced it expected adjusted EBITDA for the year ending 29 April 2018 to be in the range of £55.3 million - £56.4 million. In addition, net debt was expected to be £150.0 million as at 29 April 2018.

Assuming the Placing is successful, the Board would expect that the adjusted EBITDA* for the year ending 29 April 2018 to be in the range of £45.5 million to £46.0 million and net debt to be below £100.0 million. For the financial year ending 28 April 2019, the Board expects adjusted EBITDA* to show modest growth compared to the expected outcome for the current financial year.

The reduction in the expected adjusted EBITDA outturn for the current financial year from that announced on 13 March is principally due to (i) the Company managing its customer and supplier base through the issues associated with its short term funding requirements and (ii) the deferral of franchise income arrangements as a consequence of the Board delaying completion of further franchise agreements."

Adjusted EBITDA has gained a *.

" * References to adjusted EBITDA are stated before the application of International Accounting Standards Board's IFRS 15, Revenues from Contracts with Customers, which is to be adopted by the Company from 30 April 2018. While it has no impact on cash flow, it is expected to have an impact on the recognition of franchise income."

The implication is that EBITDA will fall on adoption of IFRS 15 in FY 2019, even allowing for prior years - can't see how they can get a fund raise off the ground without having these numbers. (IFRS 15 was brought in to promote more conservatism in revenue recognition - to go ahead and produce accounts on the current basis in the current circumstances is crazy).

Still seems a complete mess to me - the more they communicate the worse it seems.

Phil

ed_miller

22nd Mar '18

Re Premier Technical Services (LON:PTSG) & Bob Morton - well done for pointing that out - saved me a job. Those considering an investment should consider searching for his name on www.shareprophets.com & on Google.

Paul Scott

PTSG management come across as being super-efficient. However, the involvement of tainted Bob Morton, and the excessive level of debtors (with unsatisfactory explanation of - we make a high profit margin, so we allow customers to pay us slowly) simply didn't ring true to me.

Take a look at Director remuneration & share options, and what looks like nepotism to me too.

Looks great superficially, but I'm not convinced.

abtan

Re Airea (LON:AIEA) results released yesterday.

I don't hold, but was intrigued enough to do some digging.

Despite initial enthusiasm I'm now in 2 minds on whether I like it or not. It's worth noting that I'm especially put off by the vast number of unknowns inherent in comparing 12m vs 18m figures.

Some thoughts below, which mainly focus on Burmatex, which will presumably (and essentially) become Airea going forward:

I found the last Burmatex accounts filed with companies house for 2016 quite useful (link here). Of particular note were a couple of references to intra-group movements (see note 12 debtors for an example). These adjustments always put me off as I never know how much intra-group sales increase the top line, but then have no effect on the bottom line as, presumably, commensurate COS are consolidated at a group level.
EDIT TO ABOVE BULLET POINT: Using Geographical splits published for Burmatex and Ryalux (link here) from companies house, and total revenue reported today for the 12 months to 2016, it appears as though intra-group UK sales were £960k. I do not know which subsidiary company booked this additional revenue in 2016.
Burmatex revenues haven't actually proportionally increased: 12 months to mid-2016 = £18m, 18 months mid-2016-to-end-2017 = £27m. This is despite a "58% increase" in non-UK revenue in the last 6 months (presumably all in Burmatex)
Re. the 58% increase in non-UK revenue in the last 6 months (presumably all in Burmatex), what happened in the preceding 12 months? I don't like that management have cherry-picked what information to report on.
Non-UK revenue for Burmatex was 22% of revenue in 2016.
Burmatex dividend in 2016 was £1.4m, a potentially good sign of things to come.
Pension deficit reduction was mainly from "return on scheme assets" and not due to cash generation.
OCF before working capital looked quite high for the 12 months ended 2016, but nothing special for the 18 months ended 2018. If Burmatex was doing so well I would have expected this to be higher.
I don't understand how Burmatex's operating profit % (pre-exceptional costs) has gone from 9% in 2015-2016 to 16% in the last 18 months, and whether this latter figure is sustainable. Staff costs seemed pretty consistent from 2014-2016 (£4.3m and £4.5m respectively) and there looks to be a new lease arrangement from 2016 (£600k per year, before 2016 it was £0 per year), which doesn't really explain the increased OP%. Revenue hasn't proportionally increased. That leaves raw materials, which I would have expected to go up. The company hedges it's FX risk, so perhaps these costs were low for the last 12-18 months, but will now shoot up?

I imagine I'll be kicking myself for not buying in, but for now, I'll wait on the sidelines until there is more clarity in the numbers.

iwright7

Paul - Agree about the poor LPA (LON:LPA) English. This is how Reuters "interpreted"...

March 21

* RECORD LEVELS OF OUTPUT SUSTAINED DURING 1ST HALF

* UK RAIL MARKET IS ENJOYING UNPRECEDENTED, AND QUITE POSSIBLY UNSUSTAINABLE DEMAND FOR IMPROVED INFRASTRUCTURE AND NEW ROLLING STOCK

Yep, re Premier Technical Services (LON:PTSG) I couldn't concur more! Nicely summarised too.

doublelutz

Not necessarily a bad idea to follow Bob Morton sometimes. I made a large profit a few years ago when I followed him in buying shares at a low price in a company (sorry the name escapes me at the moment) and then got out right at the peak a couple of minutes after a RNS disclosed that he had sold half his holding. A year later the company was as good as bust. So well done Bob Morton as far as I am concerned!

-5

mrosbiston

Truly outstanding writing Paul, thanks very much for this. I don't care about the timing, we have plenty of great subscribers who provide timely information. However, for the depth and quality of your writing, there is no one else out there doing this to such a standard.

Yes, Re Premier Technical Services (LON:PTSG) (I didn't give you a thumbs down but you were pushing your luck a bit with a "well done Bob Morton" - he's thoroughly unscrupulous)

Paul Scott makes good money too sometimes trading in and out of companies he is sure are fraudulent* (he did it with Globo for instance). Operators as canny, alert and aware as you and he can make money trading all sorts of dangerous situations: it can work a treat if you get your timing right, stay lucky and don't get caught with the crap you bought when it does actually implode (which usually happens over-night).

But for the benefit of those tempted by the apparent charms of Premier Technical Services (LON:PTSG) and considering a long-term investment you might be interested to know that, according to information on www.shareprophets.com and from links provided there some time ago, that Bob Morton was censured by the Take-Over Panel for serious breaches of the Take Over Code as chairman of Amour Group and then founder-investor in Premier Technical Services (LON:PTSG). The Code requires an offer for all outstanding shares to be made if an individual or group acting in consort owns >30% but <50% of outstanding shares - Bob Morton has repeatedly arranged clandestine sales of shares to each of his four sons etc without disclosure and knowing he is, again, in serious breach of the Rules. My notes from 28/9/16: " Premier Technical Services (LON:PTSG) also took nearly 3 months to report results; it has ropy working capital, excessive share options and material 'adjusted' items to profit, plus net debt - see SCVR, 28/9/16, comment #27 (TMFMayn). Debtors (receivables) also excessive: 141 days!"

* I don't know of any other 'funny business' at Premier Technical Services (LON:PTSG) beyond that just described above and by Paul Scott - I haven't looked.

(No position.)

Just for clarity I am not suggesting anyone speculates on Premier Technical Services - I don't know the first thing about it.

Gupshall

23rd Mar '18

Share abtan’s sentiment

Re: cherry picking the 58% export sales growth, they do not point out that it is offset by a decrease in UK sales.

Re: pension deficit. I do not like the fact that it is quite a mature scheme but all plan assets invested in equities/property, and consequential vulnerability to market correction. The scheme liabilities are quite large relative to the market cap

hayashi22

26th Mar '18

Re LPA (LON:LPA): I think the writer of their releases needs to put himself into the mind of an average investor. What might be clear to him/her does not seem that way to the more distanced investor. A couple of years the ceo was using horse racing terminology to describe progress...'galloping along nicely '..that sort of thing.

Geronimo9999

3rd Apr '18

Paul,

I, too, appreciate your insightful analysis on Carpetright.

Small Cap Value Report (Wed 21 Mar 2018) - MOSB, AIEA, LPA, CPR, MTC

Moss Bros (LON:MOSB)

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