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

Good morning!

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

This list is final:

• Thomas Cook (LON:TCG)
• Avanti Communications (LON:AVN)
• IG Design (LON:IGR)
• Thalassa Holdings (LON:THAL)
• Fulham Shore (LON:FUL)

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Politics

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!

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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 equity of the Group Airline and up to 25% of new equity in the Group Tour Operator"

By my sums, that leaves approximately 0% for existing shareholders. Implementation is targeted for early October.

I'm trying to imagine what the best case scenario is for the existing shares.

The company says that shareholders will be able to invest alongside Fosun, on terms to be agreed. 

But for existing shareholders who don't put new money in, what percentage ownership will they be left with? Personally, I doubt that anything higher than a 0.1% ownership interest will be set aside for them. It's impossible to predict.

Congratulations to those who shorted this one. According to friends on Twitter, it has been difficult to find shares to borrow. So double congratulations are in order for those who identified it early and who found the borrow.

On the speculative basis of a 0.1% ownership interest being left behind for existing shareholders (excluding any new money that they put in), the shares continue to look overpriced.

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Avanti Communications (LON:AVN)

• Share price: 0.517p (-17%)
• No. of shares: 2.2 billion
• Market cap: £11 million

Half-Year Report

This satellite company has been a financial disaster, and the Directors are still keen to delist it and take it out of the public eye:

...the Directors have recently recommended to shareholders that it would be in the best interests of the Company to cancel the admission of the Company's Ordinary Shares from trading on AIM... If approved, the last expected day of dealings in the Company's Ordinary Shares on AIM will be 17 September 2019.

Financially speaking, this has been a no-hoper for quite some time.

It talks about positive EBITDA today, asking shareholders to ignore the small matter of depreciation.

From an accounting point of view, depreciation gobbled up around 90% of Avanti's H1 revenues. It's reasonable to query whether or not this is fair to the company - maybe this should have been 75% or 95%, instead - but ignoring depreciation completely just can't be the right answer. Avanti is a satellite operator, and satellites need to be replaced from time to time.

Anybody still holding this one must have nerves of steel. 

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IG Design (LON:IGR)

• Share price: 597p (+1%)
• No. of shares: 79 million
• Market cap: £469 million

Trading Update

This gift packaging and stationary business has achieved a lot in the last few years, including a £56 million acquisition in the US. Credit to management for building a big and successful business.

It confirms today that its order book and production volumes for FY March 2020 are in line with expectations.

While I think this is a good business, I am reluctant to study it in much detail currently, for two primary reasons:

Firstly, the PER of 18x is a little offputting. That might be fair value for a high-quality designer and manufacturer of consumer products, with international diversification, but it's unlikely to be cheap.

Secondly, there is a recent pattern of insider selling:

• The CEO sold 2.1 million shares in January at 554p (leaving him with 2.4 million shares, i.e. he sold almost half of his shareholding).
• The UK MD exercised 250,000 nil-cost options in June and immediately sold them at 604p. He owns no shares in the company.
• An NED sold 320,000 shares in June at 604p-612p, which was about half of his holding in the company.

More bullishly, I note that Octopus and Blackrock have been building their stakes in this business.

But on the whole, I would personally doubt that 600p is a great entry point for new investors. Might be worth researching for a future buying opportunity at lower levels.

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Thalassa Holdings (LON:THAL)

• Share price: 70.5p (-0.7%)
• No. of shares: 17 million
• Market cap: £12 million

Interim Results

This eccentric investment vehicle reports 126p in NAV.

It compares itself to Berkshire Hathaway ($BRK.B, in which I have a long position), as it also holds a large cash balance (proportional to its size) and waits for more attractive valuations.

Using the updated book value per share of Local Shopping REIT (LON:LSR), where it is a 25.5% shareholder, Thalassa reckons that its own proforma book value per share is 137p.

The outlook suggests that Thalassa is not going to be deploying much of its $28 million cash pile any time soon:

The THAL Board is firmly of the view that current Stock Market Prices do not reflect either current corporate fundamentals nor the risk of a substantial correction caused by worsening economic conditions or the possibility of conflict in the Gulf, the South China Sea or even Kashmir; with this in mind the Board is of the opinion that a substantial dose of caution is warranted until Political and Economic stability are reinstated…which we do not anticipate in the near future.

For now, its portfolio consists of a small early-stage business, the stake in LSR, and a couple of shells, plus a tiny start-up (see my previous coverage).

My view - this vehicle's unclear investment strategy and its strange history make it uninvestable for me, which is a shame, because the discount to cash combined with the share buyback would otherwise make it a screaming buy. I'll continue to monitor.

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Fulham Shore (LON:FUL)

• Share price: 11p (-1%)
• No. of shares: 574 million
• Market cap: £63 million

AGM Statement and Trading Update

An update from Fulham Shore:

Overall, trading for the Group in the financial year to date continues to be in line with management expectations.

I want to correct something I said in my previous coverage of this share.

In July, I noted that full-year revenues were up by 17%, while the number of restaurants was up by only 5%. This led me to the view that the company's like-for-likes must be good.

As pointed out by Gromley in the comments that day (see #21) and also today, we need to be cautious about this.

Like-for-like numbers aren't actually given, and thanks to the pattern of store openings, they might be negative.

As Gromley points out in the comments below, we don't actually have confirmation of positive like-for-like sales, despite this piece of commentary from the company today:

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

Until there is clear confirmation of positive like-for-like figures, I will keep an open mind on this question.

Opening programme - sounds like it's going well, with 5 new Franco Manca pizzeria, including four outside London. More sites are being negotiated, with "ever lower rents" becoming available.

My view - I love the food but this sector is too hazardous for me, so I'll be leaving these shares alone unless they are clearly at bargain basement levels. Those who are more knowledgeable when it comes to restaurant shares may feel that the current valuation is OK.

It is forecast to produce EBIT of £3.6 million in the current financial year, or EBITDA of £8.5 million. Stocko sees some attractions, classifying it a High Flyer (one of the winning investment styles):

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I've run out of time for today, but if there is time, I will work on the backlog tomorrow.

The backlog includes:

• Loungers (LON:LGRS) (covered by Paul in the comments section below)
• Headlam (LON:HEAD)
• Wey Education (LON:WEY)
• Proactis Holdings (LON:PHD)

Have a great evening.

Cheers,

Graham