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

22nd May '19 by Paul Scott

27 comments 9138 reads

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;

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;

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

Valuation…

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Mercury287

22nd May '19

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?

Fegger

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

MiserableJacktPotato

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.

Wimbledonsprinter

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.

ken mitchell

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.

jwebster

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.

Brookeda

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

gmtrader

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

covkid

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

Aislabie

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

sharw

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.

Paul Scott

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.

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.

WDWombat

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.

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................

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.

LongValue

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.

timarr

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.

nicobos

24th May '19

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.

hayashi22

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.

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

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Paul Scott

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