Small Cap Value Report (Wed 29 June 2022) - TRB, MCB, SHOE, MUL, LOOK, SHEP, LTHM

29th Jun '22 by Paul Scott

45 comments 7448 reads

Good morning, from Paul & Graham. Today's report is now finished.

Agenda -

Paul's Section:

Tribal (LON:TRB) - a quick look at yesterday's trading update for this educational sector software company. It's a mild profit warning for H1, expected to recover in H2, but the market didn't react yesterday, with the share price slightly up. Shares don't appeal on a forward PER of 18. Poor long-term track record too, so it doesn't interest me. Although the move to the cloud does look positive, with 3 clients upgrading.

McBride (LON:MCB) - we've been ringing the alarm bell about dilution/insolvency risk at this now loss-making, heavily indebted business since last year. Bank covenants are waived again today, just for another 3 months. It looks as if the clock is ticking here for a refinancing, which might involve a heavily discounted placing, or administration. I would treat this share as uninvestable. Terrible risk:reward in current circumstances.

Shoe Zone (LON:SHOE) - an impressive update, with profit guidance upped by 30% for FY 9/2022, as expected (it was obvious back in May that current year guidance was far too low). That's the right way to do it though - low forecasts, then a beat, greatly improving risk:reward for investors. It looks set up to repeat that in FY 9/2023 too. Still reasonably priced, and with a decent divi yield too. SHOE retains my firm thumbs up opinion here!

Lookers (LON:LOOK) - the bumper profits for car dealers continue (driven by supply shortages, hence higher margins). LOOK raises profit guidance again. The sector is cheap on forward PER (despite being based on earnings dropping a lot), and asset backed with freeholds too, so a fertile ground for value investors. Sector consolidation highly likely.

Shepherd Neame (OFEX:SHEP) - this Aquis-listed pubco & brewery caught my eye, with a perhaps surprisingly upbeat trading update today. Big discount to NTAV. Looks potentially interesting.

James Latham (LON:LTHM) - stunning figures, boosted by pandemic effects - higher prices, and higher margins. Half of the profits ended up being sucked into increased working capital. Taking everything into account, I reckon shares are probably priced about right.

Graham's Section:

Mulberry (LON:MUL) (£191m) - Final results from the luxury handbag brand show profits up strongly, boosted by some lease adjustments. Retail sales are doing very nicely in…

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Bouden54

29th Jun '22

I think it's no coincidence that Hotter Shoes and TGI were the last 2 investments to be offloaded as Electra was wound up - these were by far the lowest quality companies in their otherwise excellent portfolio and they were clearly struggling to get rid of them.

BnB

Capita (LON:CPI) - It might prove a good trade but, on the basis of my dealing with them as both supplier and competitor, I just don't think it is a very good company.

Threepeat

FREng

I have to say that you and Paul being surprised about Zeus non discretionary shoe sales at Shoe Zone (LON:SHOE) is indeed another surprise. Their ranges have always been "cheap and cheerful" and almost throwaway. In our area shoe shops are closing given the increasing price of good quality footwear at £50 plus (probably understated here). A quick look in their stores will quickly tell you the market segment that they trade in

shipoffrogs

My impression is that if they're now RNSing contract wins worth £0.3m a year - then they haven't been getting any other new business lately.

Paul Scott

I think both Hotter & TGIs are good businesses (I hold both MORE and UBG). The unfortunate thing was the timing - demerging them as it turned out, coinciding with a stock market high, and the start of a big problem with inflation & consumer incomes squeeze. Plus of course, botched floats by Numis, who tend to ignore private investors altogether, despite us being the obvious market for the shares. So no buyers for the shares, just sellers.

Sorry it's been such a crap situation so far, but I don't think that says anything about the potential for both businesses, if we look beyond current income squeezes, and bearish stock market conditions. They could be multibaggers in future years, who knows, from current very depressed conditions.

But I do take your point, that the demerger suggested that no credible offers at a sensible price were received for either company, which they've already told us anyway.

We can only work on the numbers we have, at any point in time, and both MORE and UBG looked good at the time. Now obviously less good, because consumers are retrenching, and both are in areas of discretionary spend.

Regards, Paul.

stuartb58

Thanks for all your efforts today, above and beyond what we might reasonably expect. I suspect the increase in inventories is a deliberate ploy to ensure rapid stock availability for customers - and better use of the cash than having it build up in the bank account for near zero return. I have asked at previous AGMs about the pension scheme and it looks like this time they have used the bountiful cash to put it in surplus (last two years contributions approx £2M and £1.8M) Total assets and liabilities in the scheme around £70M - needs Blackrock and a few others to do well on their side of the equation. Hopefully a lower contribution needed going forwards, but I will ask again at this year's AGM (and LTHM now one of the few who still provide a nice buffet lunch!)

makandy

Can you comment regarding RM (LON:RM.) compare to £TRB - Market cap of RM. is £92M (half that of £TRM), but has revenue is almost x3 that of £TRM ?. Thanks

Funnymoney

Angle (LON:AGL) Might be of interest: Getting reimbursement https://renalytix.com/getting-...

JimMcLad

Angle (LON:AGL) reimbursement codes. This topic was raised at the AGM this afternoon. Angle may apply for some codes for their own use but in the main their customers will do the work. The large pharmas Angle (LON:AGL) expects to partner have considerable experience in dealing with this aspect of the commercial setup.

Andrew Newland said the biggest obstacle to progress was changing entrenched habits and practices.

Aargh Aitch

Good strong results for Mulberry (LON:MUL) I hold. I would suggest though, Paul, that the inflationary environment may not be relevent to Mulberry, or could even be a blessing. It all depends on whether or not they are able to be a maker of true "Veblen goods"; that is items who's known high price is part of the attraction. Perverse logic states that the higher the retail price gets the more attractive the product becomes (And of course people who can pay those prices don't loose sleep over the gas bill and so are happy to pay more because they have the wealth and don't feel the need to hide it). Obviously there is a limit to this, watch forums are full of people debating whether or not Rolex has manipulated their prices to the extent that they are now taking the proverbial out of their traditional customer base. Additionally- how should I put this- Mulberry gear is pretty discrete, some higher price rivals such as LV and Balenciaga seem to be able to generate sales via big logo nonsense that looks like a market stall rip off of their own products. Mulberry 's ability to compete when it isn't quite the fashion could count against them. Essentially I suppose you just can't ascribe intagible value to the taste of the era.

Deegee Eff

I am not sure why Daniel Thwaites (OFEX:THW) is not on that list with Shepherd Neame (OFEX:SHEP) , this appears even better value, though again a family controlled business.

I particularly like the fact that when they calculate NAV per share they deduct the value of the pension deficit. I am unaware of any other company that does that.

AstonGirl

Frasers (LON:FRAS) I’ll disagree if I may here.

Fraser’s is one of my largest positions and it’s shares have held up well over the current turbulent period. This is primarily due to the substantial buybacks of shares that the company is making. From my understanding they’re doing this as Mike sees them as undervalued.

In addition, he & the Board have put in place a generous staff incentive programme called the Fearless 1000 which kicks in when the shares hit £10 for 30 consecutive days. 10 colleagues get £1m each in shares, 1000 colleagues get between £50k- £1m. There’s also a cash bonus running concurrently for those not in Fearless. I’d say he cares about his staff with this programme.

There’s also a generous incentive for the FD and his son in law, Michael, now the CEO, which kick in at higher share prices (£15 in the case of Michael) so I’m happy to hold as the shares gradually (& hopefully) continue upwards (though I’m sure it won’t be a straight line)

I expect the upcoming results to show a zero debt and a decent cash position too which for a high street retailer is a good position to be in. I get that Mike is a character people love to hate but believe this blinds them to his success as a businessperson

*as for Studio Retail, he lost millions as one of the largest shareholders . It was the bank that pulled the pin. He was just canny enough to then buy it off the receivers. I held STU too so lost on it. I’m expecting Fraser’s to make Studio profitable again

Hi Deegee Eff,

Ah yes good point re Daniel Thwaites (OFEX:THW) I'd forgotten about that one.

It's categorised differently, so I've found it in the Beverages sector, which I've sorted by P/Tangible Book below -

abtan

Frasers (LON:FRAS)

Hi AstonGirl

That's really interesting, thanks for sharing. And what an incentive scheme!

Your post intrigued me enough to take a quick look at the latest Frasers (LON:FRAS) RNS.

https://otp.tools.investis.com...

It appears as though the company is buying back shares, but not cancelling them. It looks like c25% of all company shares are now held in treasury and will presumably be given away as part of the incentive schemes you mentioned.

I'm in 2 minds about whether I like company share buybacks that are not cancelled.

On the one hand, the buybacks do help the share price. But then surely the share price would be higher anyway if there was cash accumulating in the business? It almost seems like the company is using "my" money to reward management, but saying it's actually for me.

I would prefer a company to be more open and allocate a transparent cash bonus pool in the accounts.

In any case shareholders probably don't care as long as the share price rises to £10 or £15 from here.

I should add that Foxtons (LON:FOXT) , in which I hold a position, is doing something similar, albeit, they say the buybacks are to enhance shareholder value (ha!)

That's clearly not true if bought back shares are simply given to management, irrespective of whether they deserve them, rather than being cancelled.

I should add that I don't really know too much about Mike Ashley, but it does seem like he's done quite well.

Cheers

Cisk

I'm not sure that's correct - if spending is reduced in the wider economy, I believe the rich will tighten their belts like the rest. Did the rich continue spending during any of the other previous recessions?

I'd argue that stocks such as Mulberry are more exposed as they are discretionary items. And many people save up to buy one or two pieces (maybe not so much Mulberry, but certainly Louis Vuitton and the like) will probably not be able to do so.

yiannos1

I totally agree 100% with Paul on this one ( and I had my share of disagreements with him!)

Firstly, a company with a 70% major shareholder should not be trusted for obvious corporate governance reasons.

Secondly, on valuation basis, a free cash flow of about £150m for a £3.5b market cap share is not the cheapest around.

Thirdly, about five years ago I remember that a broker sued Mike Ashley after he was promised £15m if he managed to take the share to a certain price ( he did!). Ashley denied paying saying that he made the offer while drinking heavily.

Sorry, there are better trustworthy companies around ( especially in these difficult times).

Regards

Yiannos

I've just noticed that the Frasers share count in the Stock Report is shown as declining over the last few years.

But it excludes Treasury shares, which are very material right now - c162m.
So the true share count is actually closer to 496m + 162m = 658m

Is the 496m officially the correct way to show share count?
Does anyone know if this is how institutions see the share count?

The reason I ask is because if the share count all of a sudden increases by 162m (i.e. an increase of >30%) surely the share price will take a beating?

Richard Goodwin

I believe the broker lost the court case and then sued his lawyer!

I don’t know the outcome , as it is irrelevant anyway.

1st Jul '22

Thanks Paul.

Small Cap Value Report (Wed 29 June 2022) - TRB, MCB, SHOE, MUL, LOOK, SHEP, LTHM

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Paul Scott

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