Small Cap Value Report (Wed 25 July 2018) - WGB, QTX, JOUL, BUR, NXR, APC

25th Jul '18 by Graham Neary

37 comments 11155 reads

Good morning!

Today we have interesting news from:

Quartix Holdings (LON:QTX) - interim results
Joules (LON:JOUL) - annual results
Burford Capital (LON:BUR) - interim results

We have in-line-with-expectations updates from STM (LON:STM), Empresaria (LON:EMR), James Halstead (LON:JHD) and Norcros (LON:NXR) (which I will discuss further below).

Wealth manager Brewin Dolphin Holdings (LON:BRW) issued an update which did not specify performance relative to expectations but looks strong.

Walker Greenbank (LON:WGB)

Share price: 75.5p (-8.5%)
No. of shares: 71 million
Market cap: £54 million

Trading Update

I'm detecting a lot of frustration from shareholders that the company saw fit to release this announcement at 16:27 yesterday afternoon, creating a bit of an intraday mess as far as the share price is concerned.

Walker Greenbank PLC (AIM: WGB), the luxury interior furnishings group, announces the following trading update in respect of the financial year ending 31 January 2019.

Paul has covered this company several times before (see the archives).

EPS expectations have been trending lower:

Yesterday, we learned the Board had materially revised down expectations for licensing income in the current year, after gaining "new information" on the potential profit from a recently signed licensing agreement.

Separately to this, ongoing trading has deteriorated, with orders below expectations.

Adjusted PBT will therefore be materially short of expectations.

At least we are given a new range to expect: adjusted PBT is likely to be £9.5 million - £10 million. It's very good to include this range in the RNS.

Anyway, the new estimate is not so terrible in comparison to last year's adjusted PBT of £12.5 million (2018), or the previous year's £10.4 million (2017).

And the financial adjustments the company makes don't look overly aggressive to me. Statutory PBT (what I call the "actual" PBT!) was £12.8 million (2018) and £7 million (2017).

So on the face of it, I don't see why the share price is down by another third after…

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InvestedGeordie

25th Jul '18

Morning Graham,

I wonder if you could cover APC Technology (LON:APC) (I took a position this morning) & Alliance Pharma (LON:APH) (have held for ages)?

Thanks,

IG

Reacher

Hi Warranstar, there were some positives which were stated but there also seems to be some cautionary statements being made:

- “trading profits for the period are expected to increase at a rate lower than sales due largely to the phasing of spend to support marketing and selling activities.”
- “the bedrock [products] slightly behind expectations, due to a combination of manufacturing delays and distributor order phasing.”
- the company also experienced FX headwinds and moderately lower underlying free cash flow due to I venture build up and certain tax payments.

However, full year results are expected to be in line with expectations (although no clarity is provided) and there is mention of further expansion in future years.

Most of the share price fall first thing appears to have recovered. It doesn’t appear to be a profit warning IMHO and the future seems encouraging with their diverse product range.

Graham Neary

The other one... Trakm8 Holdings (LON:TRAK) ? :)

Edward John Canham

Spot on. How did you guess?

Phil

Hi Francis, those are some good points you've raised on Walker Greenbank (LON:WGB). I've taken a gander, hope it's useful.

Cheers,

Graham

fwyburd

Thanks Graham, excellent analysis as ever.

My big concern however is about their revised forecast. If management don't know how they're doing month by month (evidenced by the RNS yesterday, less than a month after their AGM statement) how can they predict what will happen by next January?
cheers
Francis

paraic84

Superdry (LON:SDRY) has been covered on these pages previously. I think this is now priced at an interesting level following the sell-off yesterday provoked by the co-founder selling down a considerable chunk of his stake. If broker forecasts are hit then this is on a forward P/E of 11.4 which seems like good value given group revenue increased by 19% in H2 of the most recent financial year (results were out at the start of the month) albeit underlying earnings per share did not grow at this level (at 10%) due to slow down in high street stores affecting profitabiltiy and a couple of other factors. The company also has net cash. Historically it has traded at a much higher PE than 11.4 due to the growth.

I bought this morning on the basis above but thought I would just flag it as a possible value opportunity for readers. Of course you need to be happy the co-founder was selling for an acceptable reason (unfortunately no clarification was provided) and that the highstreet stores aren't going to be a significant drag on growth and profits.

ls2g08

What has always put me off Superdry, is I feel that fashion wise they are quite outdated. Lots of their product looks about 5 years out of date, with the large branding splashed all over their tees and hoodies which is not as fashionable these days. The heyday for that style was 2008-2012 with the brand leader in this style being Abercrombie and Fitch. They have done well moving away from this trend going to a much more muted style - and their sales have been picking up recently.

TamzinPiworld

If you're into IoT, we've just posted a presentation by Breed Reply, CEO, which is an investor in early stage IoT. Interesting insights into valuations and the challenges.

This is the 3rd presentation (out of 7) given during an AI morning at the Redleaf AI Conference

https://www.piworld.co.uk/2018/07/25/newgate-redleaf-ai-conference-breed-reply-ai-in-iot/

Cisk

Couldn’t agree more with your comments re: Superdry. They seem to be moving into a brand for the mid 40s year olds (nothing wrong with that on its own of course!) but it doesn’t appear to have the cachet it once enjoyed.

Indeed, if evidence from my local store (a very expensive large store in Los Angeles, which is invariably empty whenever I’ve passsed it, including at weekends) is to be believed, then maybe their overseas business isn’t doing so well. I haven’t studied the financials nor do I hold or short, just making an observation.

Brand perception seems to be everything for retailers like these - I often lament selling Ted Baker years ago and missing out on the stellar gains since, but glad I never bought into M&S!

rmillaree

Superdry (LON:SDRY)

Ref Superdry i have always thought it was the naffest brand ever (seems to be a theme here as i don't know anyone who does like the brand particularly), i was very surprised to see how well they have progressed brand and profits wise looking at the financials only very recently. Perhaps we are looking at this from the wrong perspective - looking at the financials its all about the wholesale and overseas stuff where the future growth must lie and of the wholesale sales of 323 mill 280 million comes from overseas. The growth in this area is staggeringly good looking at the last financial report - so could it be that what we see as crap uk brand the rest of the world sees as cool or at least well know enough for them to prefer it to their local offering.(I don't know any brits other than Ian Poulter who wear owt with union jack on but the rest of the world seem to like clothing with the Jackster on)

So perhaps we need to ask our Japanese, Chinese, American and Australian friends what they think of the brand and rely on their opinion rather than ours?

I do have to admit i am very tempted though based on the pure numbers to take the plunge and cash in my Chips on Next and Swap for Superdy or at least do a 50/50 combo, as Next has had a decent run appreciating something like 50% in the last 12 months without really generating any good financial results. I do though sort of feel next is now back where it should be so there could be more to come in that regard to.

Looking at the current broker forecasts for Superdry they still seem to be factoring in 10%+ growth this year and next (year) not too shabby.

Ho Hum time to be decisive for once perhaps ?

JohnEustace

Paraic,
You were buying Superdry (LON:SDRY) as I was selling!
If a founder or long serving and successful CEO leaves that's a red flag for me anyway, but now he is selling his holding that puts an overhang on the share price in my view until he is fully out, or at least accepts a lock-in of more than the 90 days that he has committed to this time.

Anyway, I hope I've left something on the table for you.

WarrantStar

Thanks Reacher.
I agree with you and will continue to hold.

willhampson

I suspect you've nailed it rmillaree. With a fashion brand, it seems to me counter-intuitive to try and apply your own personal views as to whether you think the brand is fashionable/cool/whatever. It's the bottom line and growth potential that should garner attention (or not). As Paul has pointed out a few times, its the wholesale division that is particularly attractive with Superdry (LON:SDRY). It is also very popular overseas in HK, China and Japan, as well as in continental Europe.

I currently don't have a position as I got stopped out not too long ago. I am waiting for the chart to turn before going back, although the overhang from the founder dumping stock is putting me off a bit (he still has a lot of shares to potentially off-load, which will keep a break on the share price).

Superdry (LON:SDRY)

I don't particularly see any Red Flags now with the founder selling up, to me the Red Flag event would have been back in March when he confirmed he was stepping down. Once that's job done its only sensible to cash in ones chips and move on, in some respects its so much dosh he will be getting the price he sells at doesn't matter - i wouldn't read into it positively or negatively either way from now on whether he sells the lot or not.

The reasonable news is that 4 months later they are still projecting growth over the next couple of years (glass half full at least no doubt?). Albeit the have had a minor profit warning in between.

In some respects can one bod work the same magic with a 1 Billion Cap market cap multiple overseas territories company that they worked getting there ? Look at French connection who still have the founder in charge? Ok if it ain't broke don't fix but everything comes to and end sometime and change may be a good thing.

At least buying in now one gets the shareprice approximately 6-10% cheaper than would have been the case the day before the recent share sale. That in itself seems a reasonable discount bearing in mind the fact we knew he was going anyway.

Dave_17

I've seen the same in a Bristol branch (Fishponds) but ASDA in Longwell Green was even worse this weekend. ASDA staff claimed it was just an incredibly busy day. I guess a combination of families stocking up before going on holiday and people at home buy "summer" food (drinks, BBQ food, salads etc).

Howard Marx

There are few red flads to see at Superdry (LON:SDRY) ... apart from the consensus earnings revisions, down 6% in the last 3 months.

Seems the management of Superdry (LON:SDRY) may be talking down their own profit forecasts?

Yes that put me off previously too. But when I was having a browse on their website yesterday I was encouraged that actually a lot of their clothing style has moved on. They still have the vintage-American /Japanese lettering stuff but actually that isn't such a large part of the brand as I thought it was. Plus also I agree that it feels a bit passe in the UK but I don't know about other markets if I am honest.

jonesj

Do Superdry really sell in Japan ?

It's been at least 3 years since I've been there, but on earlier visits, I don't recall it. This is a British attempt at aping Japanese style and native Japanese speakers tell me there are severe literacy issues with the Japanese text.
As a customer, I usually prefer the "proper" Japanese clothing company that is Uniqlo (Fast Retail, quoted in Tokyo), but don't fancy buying that on a PE ratio of 32.
I also think that any company that recently decided to drive customers away by having a 34" inside leg on about 90% of the jeans in the stores must be losing the plot. If they continue that for much longer, my custom will go elsewhere.

They have, however, 7-bagged in the 13 years since I first ventured into one of their stores. Another one that got away.

I won't confess to be an expert. But, yes, you could buy it in Osaka when I was there last Autumn.

Small Cap Value Report (Wed 25 July 2018) - WGB, QTX, JOUL, BUR, NXR, APC

Walker Greenbank (LON:WGB)

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Graham Neary

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