Small Cap Value Report (Wed 28 Aug 2019) - Politics, TCG, AVN, IGR, THAL, FUL

Wednesday, Aug 28 2019 by

Good morning!

There are quite a few things I might look at today. 

This list is final:


A quick interlude on politics, as this is being treated as a major story, and I guess that it is:

Government asks Queen to suspend parliament.

Parliament will be suspended between mid-September and mid-October, allowing for the new Cabinet and PM to put forward a new legislative agenda and also limiting Parliament's ability to block Brexit (of the Deal or No-Deal variety).

The so-called "No-Deal" Brexit is now more likely, although arguably a "Deal" Brexit is also more likely, too (since Parliament is opposed to both the Withdrawal Agreement and to a "No-Deal" Brexit).

Investment implications:

  • The pound is clearly weaker in the short-term (though I expect it to be stronger in the long-term). We are probably not yet at "peak uncertainty", but we should get there over the next two-and-a-bit months.
  • FTSE is marginally up today, with a weaker pound boosting the nominal value of the index (though not necessarily compensating for the loss of international purchasing power).
  • VIX (the Fear Index) is strong, around 20 today, and volatility measures in the UK are also very strong.
  • Some individuals and businesses may delay major decisions and investments (e.g. house purchases and construction) until the uncertainty has been replaced with clarity. Professional services firms such as architects, and the housebuilders, might have a tricky few months.

Trade carefully!

Thomas Cook (LON:TCG)

  • Share price: 5.9p (-17%)
  • No. of shares: 1536 million
  • Market cap: £91 million

Update on proposed recapitalisation plan

The end is approaching for existing shareholders' ownership of this PLC.

The company says that getting shareholder support for its recapitalisation plan is "preferred" (implying that there will be a recapitalisation with or without shareholder support) but that existing shareholders will be "significantly diluted".

The Chinese group Fosun will put £450 million in and get:

  • at least 75% of the Tour Operator and 25% of the Airline

Banks and noteholders will convert their debts and get:

  • "approximately 75% of the…

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

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Thomas Cook Group plc is a holiday company. The Company's segments are United Kingdom, Continental Europe, Northern Europe and Airlines Germany. Its hotels and resort brands include Sentido, Sunprime, Sunwing, Sunconnect, Smartline and Casa Cook. It has airline operations in Belgium, Scandinavia and the United Kingdom. It has a fleet of over 90 aircraft under the Thomas Cook Airlines and Condor brands. It operates from approximately 20 source markets in Europe and China. Its Sentido brand has operations in Germany, Austria, Switzerland, Belgium, Hungary, Poland, Netherlands and Czech Republic. Its Smartline brand has operations in Germany, Austria, Switzerland, Belgium, Hungary, Poland, Netherlands and Czech Republic. Its Thomas Cook brand has operations in Germany, Austria, Switzerland, Belgium, Hungary, Poland and Netherlands. Its Sunprime Hotels brand has operations in Germany, Austria and Switzerland. Its Neckermann brand has operations in Germany and Austria, among others. more »

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Avanti Communications Group plc is engaged in the provision of communication services. The Company is engaged in commercial exploitation of its space and network assets, which include its spectrum rights, satellites, intellectual property and ground station assets. The Company's products include SELECT, CUSTOM, PURE and ApTec. The Company's satellite network interface gives service providers the control across the fleet and ground infrastructure. The Company's shared bandwidth product is an end-to-end solution that provides terminal equipment and a contended access path from an end-users property to the Internet. Its service levels range from 512/128 kilobits per second (kbps) to 30/2 megabits per second (Mbps). PURE is suitable for established satellite service providers and supports any satellite based data communications application on any vendor's Ka-band hub. ApTec is a specialist systems integration and solutions sales group, which helps Government to achieve outcomes to policy. more »

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IG Design Group plc, formerly International Greetings plc, is engaged in the design, manufacture and distribution of gift packaging and greetings; stationery and creative play products, and design-led giftware. The Company's geographic segments include UK and Asia; Europe; USA, and Australia. The Company sells its products in over 150,000 stores across approximately 80 countries. It also offers a portfolio of licensed and customer bespoke products suitable for sale through multi channel distribution. The Company's products include crackers, pens and pencils, stickers, single cards and gift wrap. The Company offers its products under the brands A Star, B Stationery, Papercraft and Pepperpot. Its subsidiaries include Artwrap Pty Ltd, International Greetings UK Ltd, International Greetings USA, Inc, International Greetings Asia Ltd, The Huizhou Gift International Greetings Company Limited, Hoomark BV, Anchor International BV and Hoomark S.p.z.o.o. more »

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

19 Comments on this Article show/hide all

MrContrarian 28th Aug 1 of 19

My morning smallcap tweet:

Mporium (LON:MPM), Wey Education (LON:WEY), Thomas Cook (LON:TCG)

mporium Group (MPM) agreement with 2nd largest media agency network in the world to run in-game moment marketing for a major global rights holder and OTT subscription service provider for the 2019-2020 sports season. No numbers.
Wey Education (WEY) guides FY rev over £6m, well ahead of market expectations but adj profit only 'at least in line' due to increased marketing.

Thomas Cook Group (TCG) recap update: Fosun gets at least 75% of the Group Tour Operator for £450m and lenders to get 75% of Group Airline and up to 25% of the Group Tour Operator. The recap may, in certain circumstances, result in delisting. I'm short.

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rmillaree 28th Aug 2 of 19

Wey Education (LON:WEY)
They give us good news then take it away - revenues well ahead of expectations however the money has gone straight back out the door  to ensure current targets for next year will be met.

This increased revenue has allowed the Group to increase its marketing spend in the current year to ensure as far as possible that revenue expectations for the year ended 31 August 2020 will be met

I read that as if they are only still on track overall this year and next year despite sales being "well ahead" of market expectations - sigh.

Is it really good news that we won't now be having a  downgrade to next years sales.

Due to the spin here strangely i expect the shares to open up this am - i guess as they have previously disappointed the market numerous times a steady as you go update is good news - as is the higher revenue income as that gives them some decent momentum to take forward. 

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Paul Scott 28th Aug 3 of 19

Morning All!

Loungers (LON:LGRS) results are out this morning. It's a bit confusing because they did the IPO just 8 days after the year end date for the accounts that have been published today. Therefore the figures need to be adjusted for the new capital structure (as previously it was loaded up with PE debt), both balance sheet, and P&L finance charge.

I was worried that the post-IPO debt still looked too high. However, I made a mistake in my appraisal of the Admission Document, in that I somehow didn't spot that the preference shares were swapped for ordinary shares in the IPO.

Note 9 of today's accounts shows the pro forma net debt position as £26.1m, which looks reasonable to me, and is not a concern.

In terms of valuation, this looks to be an EV/EBITDA of about 11.

EV/EBITDA is the most sensible way to value companies in the hospitality sector, in my view, and the view of brokers, bankers & acquirers - this is the main multiple they use.

Whereas Revolution Bars (LON:RBG) (in which I hold a long position) is valued on a EV/EBITDA of about 4 - much cheaper, but that reflects several things;

RBG has been performing poorly (although I'm hopeful that a turnaround under new management should be bearing fruit soon, now they are revamping tired old sites, and have numerous other performance improvement initiatives underway.

LGRS has achieved very good, 6-7% p.a. LFL sales growth for the last 3 years - so there's no doubt that it's a well-run operation, and appeals to customers. Note that LGRS is an all-day operation, whereas RBG is very much focused on late night operations, Thu, Fri & Sat, which is where it makes its money.

LGRS is expanding fast, so is a roll-out, whereas due to poor performance RBG paused its roll out.

Another way to look at it, is that LGRS makes £20m EBITDA, and has a market cap of about £190m.

RBG makes £12m EBITDA, and has a market cap of £34m.

That gulf in valuation seems far too wide to me.

Here is the LGRS pro forma net debt calculation;


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fredericktug 28th Aug 4 of 19

£HEAD interims this morning. LFL's creeping up, stat profit slightly up (underlying slightly down), cost savings emerging, net cash of £32.5 makes it a relatively safe value and income stock, which the stock algorithms seem to like. Thoughts welcome. I hold.

£OPTI interims too.  And the market recognising this stock for what it is? Granted there's lots of "deals" and "progress", just little by way of sales, and a huge market cap that seems hugely excessive. Does anyone dare draw fire and insults from a certain journalist who likes to promote this. He holds, I don't!

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Wimbledonsprinter 28th Aug 5 of 19

In reply to post #508201

I hold Wey Education (LON:WEY) and I think the stock price will continue to grow if WH Ireland's long term forecasts are hit. While the FY20 revenue forecast does not look unobtainable (+11% on 2019), the FY21 forecasts (which still look quite ambitious to me) have been for £9.0m in revenues (+34% on FY20E) and £1m in FCF generation and an ending net cash position of £5.3m. On the basis that the FY21E forecasts are obtainable, the current £13m market cap does not look expensive - especially as the company would be on a strong growth path at that point.

But I totally agree with your cynicism over the PR spin about beating "market expectations". The last broker note (following the strong May H1 figures) by WH Ireland (NOMAD and as far as I am aware the only broker - therefore the one setting the market expectations) said that the "risk, is clearly towards the upside with respect to the 2019 estimates". Now we have with great fanfare, an RNS that market expectations have been beaten.

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Gromley 28th Aug 6 of 19

I might be guility of being unduly sceptical of Fulham Shore  ( I felt that the FY results in July, led us to believe that the 17% revenue increase was predominantly organic. Having scratched below the surface I actually came to the conclusion that LFLs were actually probably slightly negative. I made some comments on this in the SCVR at the time.

Today's trading update increases my sense of unease.

In the first 21 weeks of the current financial year, total Group revenues have increased compared to the same period last year.

Given that they are a roll out, it would be pretty disappointing if that were not the case. We are given no clue as to how much they are increasing.

The verbage implies that while LFLs at Real Greek have until recently been negative at Franco Manca they have been positive.

However if the last part of that were true, would it not be simpler to say so instead of :

At Franco Manca, increased revenue is being driven by restaurant openings and increased customer numbers.

With this year having 52 weeks (53 prior year) they need revenue growth of 10% to meet the forecasts indicated on Stocko. With a smaller tailwind from new store openings this year I'm not inspired to believe they will hit this, even though they do say they are inline with management expectations.

Looking at the forecast I am also unclear how an 8.5% revenue growth delivers an increase in EPS from 0.12p (0.15p normalised) to 0.5p. Economies of scale are one thing, but to me that infers a 3 fold increase in operating profits.

Of course if that figure is correct then the forward PE of 22x might be justified.

They are continuing to expand and I do like the fact rents on the new venues are getting lower and lower. There's another bit of irksome verbage here too (although I am a bit curmudgeonly)

we will continue our policy of funding new restaurant openings largely through internally generated cash flow.

So in  other words they will be burning (some) cash to support the roll out of new stores, there's no problem with doing that of course, but I just dislike the positive spin put on the message.

Not for me at this time therefore, but I'll continue to watch with interest.

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FREng 28th Aug 7 of 19

The loan to the Thalassa Discretionary Trust, the shares owned by that trust and the commercial relationship with a consultancy company in which the chairman has an interest, plus the BVI base, make £THAL uninvestable to me, too. I would be nervous that £THAL might be taken private.

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Graham Neary 28th Aug 8 of 19

In reply to post #508286

FREng - yes, there are lots of weird things at Thalassa Holdings (LON:THAL). Thank you for pointing out a few of them for readers. G

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mikelevie 28th Aug 9 of 19

Hi Graham - out of interest which UK volatility measures do you monitor?

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Graham Neary 28th Aug 10 of 19

In reply to post #508296

VFTSE is no longer provided so I look at the IV of individual options.

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jwebster 28th Aug 11 of 19

A Brexit news day

My UK property shares taken out back of the woodshed after some recent gains. E.g. British Land (LON:BLND) and Countryside Properties (LON:CSP)
But my small caps with international earnings doing well and Silver up significantly
Overall can't complain. A win for diversification it seems.

I continue to dip buy UK small caps with reasonable PER, ok dividends, generate cash, low or no debt, sell products in an international market, with a brand or USP. I see these as somewhat unfairly bid down in the general small cap malaise. Thanks to the SCVP for generating ideas!

On balance of probabilities, hard Brexit is the most likely outcome from the range of possibilities, and thus would generate a great dip to buy into. So holding cash for that, in case it comes.

In the meantime, my silver position is the winner, but that will go into reverse when Trump cuts a deal with China on trade.

Mindful the 3mth 10year Treasury spread looks just awful, has reached -0.47% which makes me pause for thought on this ageing bull market. The bond market clearly signalling rates are going down. I've run through the latest US stats and the consumer is in good shape, still spending and in high employment. Industry is the weak point, orange lights on housing starts and industrial production. Q3 earnings being talked down fast. EFT fund flows show investors moving out of stocks and short dated bonds and into long dated bonds, gold and utilities. I still think, on balance, Trump has his eye on the prize - next year's election, so the bull market will continue in some fashion in the lead up to that event.

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Effortless Cool 28th Aug 12 of 19

Avanti Communications (LON:AVN): "Anybody still holding this one must have nerves of steel".

.... more brains of lard, I would say.

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fwyburd 28th Aug 13 of 19

Hi Graham,
Great report today, thank you. And if you manage to squeeze in Proactis Holdings (LON:PHD) tomorrow, that would be great.

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Graham Neary 28th Aug 14 of 19

In reply to post #508341

Hi Francis - thanks, I've added it to the list for tomorrow. G

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LeoInvestorUK 28th Aug 15 of 19

I covered Wey Education (LON:WEY)'s update on my blog today, both first thing and with a more comprehensive write up at lunchtime.

I am more optimistic than some here on the FY 2020 and 2021 forecasts. In particular I don't think higher investment in advertising is necessary to beat FY 2020 and although the forecast growth rate from FY 2020 and 2021 looks optimistic, the likely FY 2020 beat will make FY 2021 considerable easier to achieve.

I note WH Ireland have not upgraded their FY 2020 forecasts, but I suspect this is in order to save some good news for the November results.

(Also I posted a Fulham Shore (LON:FUL) AGM report)

Blog: LeoInvestorUK
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LeoInvestorUK 28th Aug 16 of 19

Wey Education (LON:WEY) test

[Sorry, having problems with ticker expansion on the new website and for some reason thought there was a delete option]

Blog: LeoInvestorUK
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Gromley 28th Aug 17 of 19

In reply to post #508271

Thanks for the mention re Fulham Shore (LON:FUL) Graham.

I notice that you have identified the forecast EBIT & EBITDA numbers and these are somewhat more credible than my ham-fisted attempt to work back from the EPS figures. I overlooked the fact that tax was 50% of pre tax earning last year - which I presume to be exceptional, although it would be wise to understand why.

For completeness then here's what I think the numbers imply

2019 2020 (F) Change £m Change %
Revenue 64.0 69.5 +5.5 +9%
Gross Profit (40%) 25.7 27.9 +2.2 +9%
Depreciation -5.1 -4.9 +0.2 -5%
Other Opex -18.9 -19.4 -0.5 +3%
EBIT 1.8 3.6 +1.9 +106%
Interest -0.3 -0.3 +0.0 +0%
Pre tax 1.4 3.3 +1.9 +129%
Tax -0.7 -0.6 +0.1 -12%
Profit After Tax 0.7 2.7 +1.9 +269%
Diluted shares 581.6 581.6+0.0 +0%
EPS (p) 0.12 0.46 +0.33 +269%

The reduction in depreciation (the difference between EBIT & EBITDA) makes little sense to me, so I'd probably call the profit down c. £0.3m. For other Opex to increase only 3% on a 9% increase in turnover, some of which *** driven by new venues looks optimistic, but could be explainable. Interest should also be up a little, but I've assumed flat here.

So I cannot quite see 0.5p EPS but maybe 0.4p if they can hit that revenue growth, that would imply a forward PE ration of c. 28x , which is a little racy, but if they can achieve that growth in a market that remains difficult, it might well mark them out as a winner.

*** In fact I have just rechecked the number of stores which I failed to save when I had a look in July and if they complete the target 10 new stores this FY (5 completed and 2 underway) their "average number of venues" this year will increase by 11%. So arguably more than all of this years revenue growth will be from increase in number of venues.

On the one hand this means my earlier view that they will struggle to reach the revenue growth overly pessimistic. On the other hand it looks less credible that they can contain the increase in "other opex" to only 3%. Further it does suggest that LFLs (or at least average revenue per venue, which I accept is not quite the same thing) is forecast to decline this year.

There is probably much here to like, but I cannot get over the feeling that we are being fed an over-cooked story.

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Aislabie 28th Aug 18 of 19

I appear to have picked some of the smaller stocks where comments never occur and when I mention them there is only a deafening silence from the forum here. An example would be Orchard Funding (LON:ORCH) which updated well a couple of weeks ago and attracted neither comments or trading activity.
I will try again today!; Bigblu Broadband (LON:BBB) reported on a first half that appears to endorse their forecast move towards profit and cash generation. As a “sucker stock” with an SR of 12 it is clearly not for everyone, but the revenue is increasing (21.9% and 12.8% LFL), ARPU is increasing (5.8%), operating profit was £0.7mm up from a loss of £4.7mm.
The drive is to increase revenue from what is now a much more slowly growing cost base. I like to buy a bit ahead of full recovery and I think this one is on track

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davidjhill 29th Aug 19 of 19

In reply to post #508376

Bigblu Broadband (LON:BBB) Simon Thompson of IC also very much likes these and has a conservative target on them north of 165p. I tend to concur and am also long.

The macro/regulatory and government environment is highly supportive of their business model and the growth they are targeting doesn't appear stretched in reaching 150,000 subscribers. Margins are good and an interesting recent financing of Quickline, one of the businesses they bought, which also reduces overall debt. That business has margins of circa 50% and if it achieves the 30,000 customer base over the next 3 years in its plan it should be generating over £6m in cash profits alone!!

Looking at forecasts a cash profit of £11.5m for next year means they are now on 6* earnings vs EV. That looks a bit of a nonsense to me. I'd expect more like 10* which would be £115m EV. Deduct debt to reach a £105m market cap and about 50% upside to fair value for me. If they hit growth targets then substantially more over next 2-3 years.

I think the current price reflects a hangover from investors still pricing in risk for the initial "buy and build" phase, especially given the inherent dangers in that strategy. Debt was also building as they financed it. However, corporate activity is now largely done from what I can make out, though I wouldn't rule out bolt on acquisitions, and importantly debt is reduced to below 1* cash profits post the financing arrangement on Quickline.

I now see this play as significantly de-risked. Growth rates over last couple of updates are in-line with the strategy and no signs of that being derailed soon. I like them.

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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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