Small Cap Value Report (Wed 22 May 2019) - W7L, VTC, VLE, PETS

Wednesday, May 22 2019 by
57

Good morning, it's Paul here!


Pre-7 am comments

As I'm up early today, let's have a quick look at yesterday's stragglers.

I can't motivate myself to look at Nexus Infrastructure (LON:NEXS) in more detail, so have instead looked at a couple of more interesting announcements from yesterday;


Warpaint London

Share price: 102.5p
No. shares: 76.7m
Market cap: £78.6m

AGM statement

This company sells cosmetics.

Issued at 10:59am - not good. I understand the logic for announcing at this time - i.e. issue the update at the same time as it's being spoken at the AGM. However, for me the golden rule is to always put out trading updates at 7 am, when the market is closed. This enables everyone to digest the announcement at relative leisure, and gives a level playing field. Whereas an intra-day trading update gives a timing advantage to day-traders & city people who are glued to a screen all day, and hence can react (if needs be) first.

Trading update - sounds reasonably reassuring;

"I am pleased to report that the outlook for the Company remains in line with that reported at the time of the release of our annual results for the year ended 31 December 2018 on 10 April 2019.
"Whilst trading conditions remain challenging in the UK, we continue to see encouraging international sales growth, in particular in the EU and the US.
"The Group has a sound financial footing and we are actively implementing our strategy for growth.  We look forward to the remainder of the year with cautious optimism."

Why are trading conditions challenging in the UK? Consumer demand is fine, providing companies have a decent online sales strategy, as well as selling via physical retailers. My worry is that there might be something wrong with Warpaint's products?

As you can see, broker consensus forecasts have been reduced over the last year, so something's obviously wrong;

5ce4dc924cacfW7L_brokers.PNG


Looking at the share price chart below, you can see there must have been a profit warning last Oct/Nov, and the shares have not recovered from that;

5ce4dd1da9645W7L_chart3.PNG


I reported here on the 29 Oct 2018 profit warning in a fair bit of detail.

Valuation

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Warpaint London PLC is a United Kingdom-based company engaged in color cosmetics business. The Company sells color cosmetics in the United Kingdom and overseas, principally under the W7 brand. The Company operates through two divisions: close-out and own-brand. The own-brand division consists primarily of the Company's flagship brand, W7. The W7 brand contains over 500 items, which are sold into high street retailers and independent beauty shops across the United Kingdom, Europe, Australia and the United States. The W7 brand focuses on the 16-30 age range. more »

LSE Price
57p
Change
0.9%
Mkt Cap (£m)
43.7
P/E (fwd)
5.0
Yield (fwd)
9.7

Vitec Group PLC is a United Kingdom-based provider of image capture and content creation solutions. The Company operates in three divisions: Imaging Solutions, Production Solutions and Creative Solutions. The Company designs, manufactures and distributes high performance products and solutions including camera supports, camera mounted electronic accessories, robotic camera systems, prompters, light emitting diode (LED) lights, mobile power, monitors and bags. The company operates in three divisions imaging solutions, production solutions and creative solutions. It provides small high definition (HD) monitors, Teradek transmitters, tripods, Anton/Bauer batteries, JOBY GorillaPods and audio capturing products. more »

LSE Price
1065p
Change
-2.3%
Mkt Cap (£m)
482.5
P/E (fwd)
10.8
Yield (fwd)
3.8

Volvere plc is a holding company. The Company identifies and invests in undervalued and distressed businesses and securities, as well as businesses that are complementary to existing group companies. It operates through Food Manufacturing segment. Its food manufacturing segment consists of the Company's subsidiary, Shire Foods Limited (Shire), which is engaged in manufacturing frozen pies, pasties and other pastry products for retailers and food service customers. more »

LSE Price
1180p
Change
0.9%
Mkt Cap (£m)
21.6
P/E (fwd)
n/a
Yield (fwd)
n/a



  Is LON:W7L fundamentally strong or weak? Find out More »


27 Comments on this Article show/hide all

Mercury287 22nd May 8 of 27
18

I’m not usually one for being particularly PC but ‘readers’’ wives’ dis seem a particularly jarring throwback to a less enlightened time - women don’t subscribe or invest?

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Fegger 22nd May 9 of 27
25

Well you do actually have a few female SCVR readers. I did buy one Warpaint mascara but dont love it. So wouldnt buy it again in such a competitive market with so many options. For cheaper makeup I always head to MUA in Superdrug . It seems very popular as the lines seem to sell fast and there are often a few gaps on the shelf (but maybe Superdrug just isnt that efficient)

I did some searches for makeup and Superdrug came up on the first page with 2 entries so they have their SEO sorted.Warpaint was nowhere. I also noted that they have set up a freestanding MUA store now so it must be doing well. I find the MUA products generally very good and really good prices. Bought 2 great eye pencils at weekend which I love for £1 each. www.muastore.co.uk

Found also this warpaint for men site which does not seem to be Warpaint plc owned. https://warpaintformen.com/ . I would be disappointed in this were I an investor.

Their list of actual physical stockists is here. https://www.w7makeup.co.uk/pages/stockists . I would have hoped for wider. I havent been in but would be interesting to know how much space and promotion they actually get

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IGotPoesJacket 22nd May 10 of 27

I don’t understand why W7 isn’t being sold on boohoo, especially as Technic, another of their brands (that they recently acquired) is. Maybe the plan is to boost Technic brand sales in the online space?
I’m no marketeer, but I wonder if selling in stores like B&M makes the core W7 brand harder to sell in fashionable places so adding lines to another, reasonably established brand, for sale on the likes boohoo.com makes sense.

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Wimbledonsprinter 22nd May 11 of 27
3

Warpaint

I have a soft spot for this company (because of its commitment never to test its products on animals - an important point to me). Nevertheless, despite my natural bias, I am not convinced by the financials. The key brand is W7, which seems to have gone into reverse, particularly in the UK. Pre-IPO growth was organic but last year it was all due to acquisitions full year of (Retra plus US distributor). 2018 saw overall LfLs down 3%, with UK sales down 9%. Therefore the UK issues mentioned at the AGM are not new and, to me, indicate a bigger problem with W7, in its largest market.

I still think the jury is out to on the logic of the critical Retra acquisition (Nov 2017), a business largely based on gifting, which introduced significant H2 seasonality (for Christmas) into the business. The profit warning in October last year, indicated that management was still trying to understand this seasonality.

From the Hardman forecasts, the FY19 numbers (which management say they are on track to hit), imply low LfL growth in revenues - as this year will benefit from the full year impact of the Leeds Marketing acquisition. I am not sure how the company will increase organic growth to c9%, forecast for FY20.

I am still want to buy these shares - but not at 102p, given the current outlook for W7.

PS Warpaint had a stall (but did not present) at Mello Kent (2018), where they gave out goodie bags.   I am sure therefore, some readers must have tried the products.

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ken mitchell 22nd May 12 of 27
7

IG GROUP (LON:IGG) trading update today looks reassuring.

Ditto the strategy update.

Share price fell from £9.50 to below £5 as ESMA regulations hit trade and profits, but update today suggests they are now coping well and adjusting to ESMA. And first 3 weeks of May show improvement too. 

Key attractions are the 43.2p dividend which they have again committed to maintaining (yield over 8%) and looks a classic recovery share. 

Graham Neary holds and updated in detail why in March.

https://www.stockopedia.com/content/small-cap-value-report-thur-21-march-2019-igg-nxt-gmd-ketl-ted-lsrthal-460178/

I had sold but have bought back today.

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jwebster 22nd May 13 of 27
6

IG Group (LON:IGG)

Released positive update today.

Trading update indicates FY19 operating profit of £190m. They expect to maintain the 43.2p share dividend which I estimate will cost them £160m in cash for the full year. In terms of dividend cover H1 generated 112m in OP and 69m in own funds after Capex and tax, about a 61% conversion. This implies 190m OP converts to 135m own funds.

It won’t cover the dividend but not a huge gap. Interesting as on today’s share price of £5.25 that’s a yield of 8%.

Personally I use IG’s platform it’s one of the better ones. Management seem to have a number of plans to expand revenue abroad. They have a few pilots but have flagged significant cost increases to fund them which will drag OP.

Overall on balance we may have seen the bottom of revenue fall out from the new regulations and some mgt actions to increase revenues from here. Dividend cover is squeaky but 8% yield is interesting to me.

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Brookeda 22nd May 14 of 27
8

SafeCharge International (LON:SCH) increased 20% this morning after a bid from Nuvei this morning. In a way I am quite disappointed as I was expecting this to be a multibagger over time. There's always a chance someone else will come in higher but this one looks a done deal.

I have been long on this for a few years

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gmtrader 22nd May 15 of 27

Always been put off PETS due to being retail but also currently has 7% of shorts.

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covkid 22nd May 16 of 27
4

In reply to post #477756

Maybe Paul was just suggesting that it's mainly women who wear make-up................

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Aislabie 22nd May 17 of 27
8

In reply to post #477816

Your views exactly mirror mine. I should be happy that my SafeCharge International (LON:SCH) holding has done so well and a 25% leap today is very welcome, but there could have been so much more.
The position we have in financial services is and has been a tremendous benefit to the UK, and the current growth in FinTech driven startups is encouraging. But we need some companies to have the long term ambition to be world size. I believe direct carrier billing is going to be a major long term part of the world settlement system and if we are seeing sellouts now, we not only lose our own part in this but we enlarge someone else's.
Katie Potts at Herald has regularly bemoaned the "sell-too-early" mindset in the UK and I think she is right on the mark.
Both the banks and the telecoms have comprehensively failed to understand the threats of being disintermediated by fintech and still don't seem to get it. Personally, I tried very hard to get telecoms companies to provide direct carrier billing for online games. but however much I tried to get them switched on the lights were out. So unless someone at , say, Lloyds surprises me with a knockout bid for Safecharge (or Boku, or Bango - or Nuvei !) we can expect to see banks take a more and more subservient part in the financial system
So today's news is profitable but rather bitter

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sharw 22nd May 18 of 27
3

On a relatively quiet day for news perhaps we should mention the demise of Jamie's restaurants. Business rates and staff costs are among the usual things to be blamed so there may be some read across to the likes of Restaurant (LON:RTN) (-4.7% at the moment). Fulham Shore (LON:FUL) and Tasty (LON:TAST) are unchanged.

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Paul Scott 22nd May 19 of 27
18

Sorry if I offended anyone in the way I worded my suggestion that readers asked for female views on W7 makeup. When you're covering lots of companies very quickly, you sometimes forget to be PC!

Anyway, apologies to our female readers, and many thanks for the excellent comments on product quality.

Regards, Paul.

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Mercury287 22nd May 20 of 27

In reply to post #477831

I’m sure he was but the premise of the comment is the readers are all men (or I guess non-make up wearing same sex partners...) Thought I should note the casual sexism, I applaud the apology, so no harm done. The content as ever is insightful, so thanks for all your efforts Paul.

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WDWombat 22nd May 21 of 27

Congrats to Aislabie on his Safecharge. I am sad to say it was (is) on my possibles list but I had never done the work. I used to hold Bango BGO but became disillusioned after three of four years, feeling they were just not getting the needed traction. This is, after all, a competitive area but quite difficult for a layman to comprehend - I did well out of Paysafe, however, which also was taken out. Interesting to me that you should quote Katie Potts whose company I respect and whose shares are in two portfolios I advise (small ones!). The l-t record is pretty good though nothing like Lindsell Train or Scottish Mortgage.

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covkid 22nd May 22 of 27
3

In reply to post #477896

Do any readers' wives have a view on Warpaint product? It would be interesting to hear any feedback from you.

This is what he said & somehow you managed to find an implication that really isn't there - he was asking the men readers to ask their wives - nothing more. He wasn't suggesting that only men read it in the same way he didn't ask for any make-up wearing men to comment on product quality - or maybe you missed a chance to get on that bandwagon too................

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ken mitchell 22nd May 23 of 27
2

In reply to post #477781

Positive Market reaction to IG update, with 63p/14% share price gain. (But similar market response to Galliford's update yesterday has been lost already with 50p share price drop today so perhaps a good chance of getting in lower if interested).

I'm currently keen to find shares not likely to be badly affected by Brexit, Corbyn or trade war worries and would welcome info on any shares that seem to fit that bill.

IGG looks a good example as the more volatile the markets the better. And the improved performance this month is as IG said today, thanks to more volatile markets.

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LongValue 22nd May 24 of 27

IG Group (LON:IGG)
It would be interesting to know whether IG's bullishness is a result of the industry successfully adjusting to the ESMA rules. Or is it simply effectively executing its turnaround strategy. We seem to be going into a period of political and economic turbulence. And this volatility benefits the spread betting sector. IG Group (LON:IGG) is not a stock I hold but I do hold CMC Markets (LON:CMCX). The latter's share price is up today but not as much as IG Group (LON:IGG). Incidentally, both are high yielders and cash rich. Importantly, should markets turn very nasty they are two of the few companies that stand to benefit from the oscillations.

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timarr 22nd May 25 of 27
4

In reply to post #477946

IG Group (LON:IGG)

It would be interesting to know whether IG's bullishness is a result of the industry successfully adjusting to the ESMA rules. Or is it simply effectively executing its turnaround strategy.

The ESMA rule impact is still ongoing but will start to wash out in the year on year figures from mid-year. The question from the previous numbers was whether the decline was solely ESMA related or was a result of lower volatility in addition to the new rules. The company claimed the latter, and it looks like that was correct. Although note that the fall in revenue appears to be entirely from the ESMA impacted region and regulation is often contagious.

When regulation is tightened it's generally the market leader that benefits as it's able to scale more effectively, diversify better and take a bigger share of a reduced market. Hopefully that will be the IG Group (LON:IGG) story going forward. On that basis I'd be reluctant to invest in any of the smaller players until we have some more data.

Note though, that if my number crunching from today's two announcements is correct, they expect to be delivering £575 million in revenue in 2022, with some increased costs. That's a pretty decent return from here, but still below what they did in 2018.

But as you say, if nothing else they're a useful hedge against market volatility which, presumably, offers some upside on those figures.

timarr

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nicobos 24th May 26 of 27

In reply to post #477826

Pets at Home (LON:PETS)

The shorts are part of the attraction of the investment. Once the story starts to change (as I believe it now has), the fundamentals will play out and ultimately shorts will be forced to close their positions. This is probably what's responsible for the strong price action we are seeing on Pets at Home (LON:PETS) over the last couple of days.

Retailers (especially those with debt!) are highly operationally geared and that works both ways. The change in LFLs and better performance on Veterinary will drop through to the bottom line and result in a decent profit upgrade. Retailers (when performing) are also very cash generative so would expect them to be able reduce the debt burden.

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hayashi22 24th May 27 of 27

Re Pets at Home (LON:PETS): the stores always seem busy and buying food and stuff for guinea pigs is not cheap so the margins must be high. Alot of punters though who just seem to look at the various pets rather than buying.The grooming section always busy and folk will spend a fortune once their pet is onboard so to speak. This looks to be a good recovery play.

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 Are LON:W7L'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 Stockopedia.com on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »

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