Small Cap Value Report (Wed 27 Feb 2019) - NICL, TED , BKS, AVG, ARC, IGE, SIS

Wednesday, Feb 27 2019 by

Good morning!

Plenty of companies to report on today. I may need to work through the afternoon to cover them all:

Nichols (LON:NICL)

  • Share price: £15.80p (+3%)
  • No. of shares: 37 million
  • Market cap: £585 million

Preliminary Results

The secret is out that this soft drinks company is rather high-quality. Let's see how recent performance stacks up:

  • sales +7%

Geographically: led by UK sales. Held back by weakness in the Middle East (Yemen).

Product-wise: led by fizzy drinks, particularly by its core brand Vimto.

  • operating profit +10%, although only +3.6% on an underlying basis (2018 benefited from a lack of exceptional items).
  • final dividend +14.5%.


  • Vimto still outperforming the wider soft drinks market
  • Has been buying regional distributors, "consolidating route to market".
  • Fine weather in 2018 was offset by Co2 shortage.
  • Achieved distribution to 100 US stores (Walmart).

Outlook: "well-positioned".

My view: in some ways, this company's financial characteristics are dream-like. I'm not in the least bit surprised that it enjoys a Quality Rank of 98.

Is it worth accumulating at the current valuation? I would guess that it probably is. The StockRank of 88 agrees. Nichols is a "High Flyer", one of Stockopedia's winning styles:


One of my personal ambitions is to own more high-quality drinks companies in my portfolio. So far, I only have Britvic (LON:BVIC) and the rather speculative Distil (LON:DIS).

Nichols (LON:NICL) will be near the top of the list when it is time for me to increase my position size in this industry. The key risk from my perspective is that Vimto is still being enjoyed in another 110 years, but I never got to participate in it!

Ted Baker (LON:TED)

  • Share price: £17.84 (-11%)
  • No. of shares: 44.6 million
  • Market cap: £796 million

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All my own views. I am not regulated by the FSA. No advice.

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Nichols plc is a United Kingdom-based soft drinks company. The Company is engaged in the supply of soft drinks to the retail, wholesale, catering, licensed and leisure industries. Its segments include Still and Carbonate. The Company offers products under the Vimto brand, as well as Feel Good, Starslush, Levi Roots and Sunkist brands. The Company's brands span the still, carbonated, post-mix and frozen drinks categories, and can be found in supermarkets, discount retailers, cash and carries, pubs, clubs, bars, restaurants and leisure outlets. Vimto is available in cordial, carbonated and still variants with pack sizes ranging from 250 milliliters to 5 liters. Feel Good offers natural drinks in carbonated and still formats. The Levi Roots range features a selection of delicious, tropical and fruit flavor blends. The Panda range of flavored water and still drinks is aimed at mothers and kids. The Sunkist range includes flavors of Orange, Diet Orange, Lemon, Summer Fruits and Tropical. more »

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Ted Baker Plc is a United Kingdom-based global lifestyle company. The Company offers a range of collections, including menswear, womenswear, global, phormal, endurance, accessories, audio, bedding, childrenswear, crockery, eyewear, footwear, fragrance and skinwear, gifting and stationery, jewelry, lingerie and sleepwear, luggage, neckwear, rugs, suiting, technical accessories, tiles and watches. The Company operates through three segments: retail, wholesale and licensing. It operates stores and concessions across the United Kingdom, Europe, North America and Asia and an e-commerce business based in the United Kingdom, primarily serving the United Kingdom and Europe, with separate the United States and Canadian sites dedicated to North America, and a separate site serving Australia. The Company's wholesale business in the United Kingdom serves countries across the world, particularly in the United Kingdom and Europe. The Company operates both territorial and product licenses. more »

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Beeks Financial Cloud Group PLC is a United Kingdom-based provider of custom computer programming company. The Company is focused on providing niche cloud computing and connectivity services for automated trading in futures and forex financial products. The Company’s platform designed for latency sensitive automated trading environments and provides on demand low latency computing resources to its clients through its direct connectivity. The Company offers server infrastructure and connectivity to its clients which enables same day trading of forex and futures on financial exchanges and trading venues. The Company’s products include dedicated server, VPS, and Co-Location. more »

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

47 Comments on this Article show/hide all

fredericktug 27th Feb 28 of 47

Redde (LON:REDD) coming off a bit today on unspectacular results. Good quality metrics and a good but unchanged dividend.

Potentially of interest to value hunters. Had an alert on it, hence having another look...

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LeoInvestorUK 27th Feb 29 of 47

In reply to post #452488

davidjhill re Beeks Financial Cloud (LON:BKS),

The miss is related to investment in new exchanges/data centres due to demand.

As far as I can see the forecast EPS miss is caused mainly by higher cost of sales due to the startup costs of new data centres which are not expect to be profitable in the first year.

It appears they have decided the most appropriate accounting treatment was to spread the data centre costs among the sales to customers using them rather than counting them as fixed (admin) costs or even capitalising the startup costs. Maybe this accounting treatment is overly conservative and it would be appropriate to adjust the gross profit higher, maybe not.

But the real issue here is that these costs were not foreseen 6 months ago. And these are not  investments additional to those planned which have resulted in turnover additional to that planned, because the turnover forecasts have also been missed (for the second consecutive time). Nor is it apparently the case that the investments were made in the first part of the period and the revenue only started coming online near the end - monthly revenue is only up 25% (annually, not even sequentially).

The FY2018 and H1 2019 figures show a company failing to achieve compound growth and needing to cut margins to maintain a £0.5m sequential 6 monthly increases in turnover.

Next year brokers are looking for 3.8p EPS and that doesn't look like a stretch to me.

I strongly agree, it looks very easy to achieve with another £0.5m sequential revenue growth and operational gearing. Actually it is disconcertingly low. Most importantly though, 3.8p for FY2020 is very much worse than the previously forecast 3.6p for FY2019 that was the basis of the shares changing hands below 110p last week.

My other caveats (in no particular order): Backup as a service seems to be taking a long time to come online (they are capitalising part of this cost), H2 weighting, momentum broken / large private investor following, historical lease costs not abating as quickly as I hoped.

Valuation really depends on what PE multiple you are willing to apply. I think it is safe to say that Paul's previously suggested PE of 50 is no longer appropriate because of the missed forecasts. So I would say somewhere between 20 and 30. The 12m rolling forecast is probably around 3.4p so that gives a valuation between 68p and 102p.

Disclaimer: Despite the missed forecasts, this is a great company and I do suspect that they are laying foundations for future compound growth that are not fully reflected in the figures. I didn't sell all my shares and if they fall unfairly or reported figures improve I will buy back.

Blog: LeoInvestorUK
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DJCP 27th Feb 30 of 47

In reply to post #452513

@danielbird193 (#24 & #25) re Metro Bank (LON:MTRO)

I bought in just under 3 years ago at just under £22, based upon being a satisfied customer, and their vision for banking. Saw them rise to near £40 but eventually sold out last Sept. for just over £30, and have seen them drifting down since.

Even after yesterday's drop (it seems that many sold on the not-yet-announced information !), I presumed they'd fall this morning. Initially I had trouble getting an online quote, and was waiting for a sub £10 entry, but in error I clicked on the button when at 'Buy' instead of 'Requote' ! Doh !
So, I did buy, but for slightly more than I'd hoped for.

As bank accounts are too complicated for me, I don't intend holding for that long, but will sell on any reasonable bounce, or keep a tight manual stop-loss in place.

On 'the other site', there's rumours of nationalization, forced selling to Lloyds, going bust etc. ! lol With the Market Cap now just over £1b, I can't see Vernon Hill, the billionaire founder, having any problem funding or raising funds if/when required.

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Mark Carter 27th Feb 31 of 47

I seems to recall that I bought Nichols (LON:NICL) in late 90's. It was on a PE of 5. Some time later I decided that NICL wasn't going anywhere, and sold. You can probably guess the rest.

Hey ho.

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Snoo 27th Feb 32 of 47

I quite admire what Metro Bank (LON:MTRO) are doing but I do wonder if it is the brown end of the stick. Most traditional banks have moved away from branches simply because they don't make money, and despite the obvious cross-selling opportunities into other products, employing a load of people in branch isn't the most efficient way to do it.

The branch near me epitomises what they are about, great opening hours (until 8pm) but also showing signs of being victims of their own success: always extremely busy in there.

Their share price chart over the past year looks disastrous. I do wonder whether there is further to go. At one point it seemed as it their strategy would work well, in practice I think the financial markets are becoming so fragmented that customers can simply cherry pick. A Metro Bank customer could easily just get a credit card/loan/mortgage/savings with another provider if it was cheaper, while lumbering Metro with their current account (which makes them very little if no money).

As banking goes, these are changing times with Open Banking. I do believe that in the future one or more of the challenger banks will render MTRO redundant as the use of big data allows more personalised products.

7.9% for a loan at Metro Bank seems rather expensive, and I would think most people there could access it for cheaper.

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davidjhill 27th Feb 33 of 47

Beeks Financial Cloud (LON:BKS)

Graham - Brazil is one of the largest exchanges in the world by volume, it is by no means a last ditch attempt for growth!

Also, the point of Beeks Financial Cloud (LON:BKS) is to be right next door to the exchange with pipes running straight in. You are not paying for the data servers particularly, you are paying for the zero latency. Margins aren't going to get squeezed through cheaper servers, but capital/maintenance costs of the business will reduce in that event.

They have a competitive moat. It is not easy to replicate this infrastructure given what it does and the number of exchanges it occupies. Indeed if Tier 1 banks start taking its services (and this has already started) then it should become the gold standard, with very sticky client behaviour.

CAPEX isn't that high to create additional racks as long as there is room in the data centre as I understand it. Setting up to exchanges is the more onerous component.

As to valuation I pretty much agree that we are around fair value. Something akin to 30* eps of 3.5-4p (105-120p)
However, I don't see any reason as to why they can't grow at 25% p/a at the bottom line for the next 5 years to deliver 11p+ EPS. Thus on a 5 year view I can see in excess of 200p.

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tony akram 27th Feb 34 of 47

In reply to post #452518

Hi FREng,

I thought about TRS but was concerned with the level of total remuneration that Director Mr Emslie have been receiving since 2013 I fully appreciate this includes bonus and long term shares schemes however it does seem rather excessive particularly for a £330m market cap company apologies if my figures are not exact however I am sure you get my point . Does anyone agree with me ?

Share price in Jan 2013 was £2 now about £3

2012 = £706k
2013 = £1.8m
2014 = £1.5m
2015 = £1.5m
2016 = £1.7m
2017 = £2.3m

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goodapple 27th Feb 35 of 47

In reply to post #452598

Me too.

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Graham Neary 27th Feb 36 of 47

In reply to post #452598

Sorry to hear that, Mark :(

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narp 27th Feb 37 of 47

Re Arcontech

Can anyone tell me, the reduction in deferred income in current liabilities is that a positive or negative ?


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Reacher 27th Feb 38 of 47

In reply to post #452658

Hi Narp

In relation to Arcontech (LON:ARC) Deferred income relates to customers that have paid annual subscriptions that should not be recognised in the Income Statement at the period end as they relate to the following period.

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davidjhill 27th Feb 39 of 47

Taptica International (LON:TAP) & RhythmOne (LON:RTHM)

Now this is interesting. Toscafund is buying shares in both businesses. Currently owns 25% of RhythmOne (LON:RTHM) and gradually building a position in Taptica International (LON:TAP) 2.25% now.

These guys certainly aren't daft and are quite aggressive at extracting value. Situation worth watching.

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Graham Neary 27th Feb 40 of 47

In reply to post #452358

Took me a while but I covered Beeks Financial Cloud (LON:BKS) and Arcontech (LON:ARC) in the end! Thanks. G

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Graham Neary 27th Feb 41 of 47

In reply to post #452378

Hey snoo.... yes, I like to write about Ted Baker (LON:TED). Would love to buy shares in it some day but the stench around it is a little bit too strong right now. Nice to be on the sidelines at this point. G

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Graham Neary 27th Feb 42 of 47

In reply to post #452428

Hi Camtab, as you say, it's difficult when these growth stocks lose their momentum. Stock is very useful (where common sense fails) to remind us of the type of thing we are invested in. The StockRanks are quite clear that Beeks Financial Cloud (LON:BKS) is mostly momentum plus some quality, and not much value yet! I can definitely see why people like it though. G

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Graham Neary 27th Feb 43 of 47

In reply to post #452448

IPF was a nice suggestion, sorry I didn't get around to it. If Friday is quiet I might look at it. G

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JTG 27th Feb 44 of 47

In reply to post #452553

Me too. I don't see why such a dip, given div stasis is because they declare they see opportunities to grow faster. And cash buffer declined because of:
"Revenue generated debtors at 31 December 2018 increased to GBP168.7m, compared to GBP151.7m at 30 June 2018 and GBP132.4m at 31 December 2017, increases of 11.2% and 27.4% respectively. The increase of GBP36.3m from 31 December 2017 mostly reflects the increased volume of hire sales by the group.

As mentioned in the operating review the calendar year 2018 has proved a busy one for the motor claims industry with the "Beast from the East" increasing motor insurers' claims liabilities significantly. During 2018 two (non-partner) insurers writing UK business from outside the UK went into administration/liquidation resulting in a hiatus on the settlement of claims whilst the relevant regulators took over the responsibility of settling claims liabilities under their jurisdictional obligations. Whilst recoverability of these claims continues under the relevant legislation, it is clear that this is proving to be a slow process.

Statutory debtor days were therefore 109 days and compare to 105 days at 30 June 2018 and 97 days at 31 December 2017."

I still make this a 7% yield stock for ave 7% growth with an average sort of multiple. A buy at 160p? At this price it's just in SCVR territory.

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Gromley 27th Feb 45 of 47

I am puzzled and sceptical of the view from Ted Baker (LON:TED) that the issues have no impact on future outlook.

I can certainly accept that for the forex hit.

And I can just about come onside with the stock write-offs - if there were a one off relating to some particular lines. Although the tag-along statement to the £5m write-down "Ted Baker remains fully committed to driving improvements in the net working capital to sales ratio and will provide an update at the full-year results presentation." makes me wonder if there were not in fact a systemic problem, which unresolved would have a future impact - but they have plans to fix it. If so that's all well and good, but surely that gives a degree of execution risk on the assumption that there will be no future impact.

It is the extra "product costs" (£2.5m) that trouble me the most, however.

Firstly there is the question that if their current view of margins was overstated, then surely they need to increase margins in the future in order to maintain the forecasts - do they know how they are going to do that?

Secondly, their explanation is too murky for my liking:

"systems upgrades have allowed us to identify additional product costs of approximately £2.5m that arose during the second half of Year 18/19.  We are confident the systems upgrade now provides robust controls to prevent a recurrence;"

That does not make sense to me, is it the case that :

  • They have been able to detect these costs in H2 -18/19 but might they be there before that?
  • They were new costs that only started to arise in H2?
  • They were costs that they were able to measure prior to H2, but lost track of for a while? (If so one has to wonder where they thought the extra margin was coming from?)

Maybe I am being overly cynical here, but when management fail to explain something clearly I am tempted to think one of two things might be true : (1) They do not understand it properly themselves or (2) they would rather that investors do not understand them too well.

For me personally, this lack of clarity makes Ted Baker (LON:TED) investigable at this time, especially as there might be question marks over the quality of the management.

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dpshares 28th Feb 46 of 47

In reply to post #452688

I saw, thanks Graham!

Both interesting shares. Arcontech - I like, and appreciate the conservative nature of their RNSes. Beeks on the other hand I am much more uncertain about. One can see the potential of future growth, and I think its biggest plus is the moat that having hardware in key locations provides. I am not as concerned about hardware obsolescence as I do not believe processors, memory, storage is quite advancing at the rate it once was. The valuation though, is extremely rich, and I have this nagging feeling that something about the language of the RNSes or a tendency to over-promise is unsettling.

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Dave_17 28th Feb 47 of 47

In reply to post #452613

I looked into Beeks Financial Cloud (LON:BKS) last night to see what they really offered. As background my profession is in telecoms designing and building networks. I understand the need for very reliable low latency networks but don't have specific finance sector insight so may be missing something.

From what I can gather I don't see anything really unique that isn't easily replicated. Colt may well be doing something similar but with less focused sales and marketing. I didn't research Colt to see.

What they appear to be doing is renting racks in commercial data centres, equipping them with low latency routers and VMs. Then using carriers (probably Colt) to connect together with low latency circuits. All fairly off the shelf stuff.

I don't see tier 1 banks really getting involved much, other than "try before you build your own" as they have the scale, money and resources to do it themselves. Also for smaller operations they still need a high degree of in-house knowledge as none of this is turn key solutions.

Low latency is only of use for automated or high frequency stuff (algorithms, etc). Any human input into a deal means latency is out of the window.

Price points seem low so need a lot of volume to get high revenue.

Just noting down my observations, no + or - on the company itself.

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 Are LON:NICL's fundamentals sound as an investment? Find out More »

About Graham Neary

Graham Neary

Full-time investor and independent analyst. Editor at Cube.Investments, small-cap writer at Stockopedia. Previously a fixed income analyst in the City and institutional fund manager. I'm a CFA charterholder and have the Investment Management Certificate and STA Diploma in Technical Analysis for good measure. When I'm not talking about finance, I enjoy recreational poker, chess and Mandarin Chinese. more »


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