Small Cap Value Report (Wed 4 Dec 2019) - LGRS, QUIZ, PCF, SAA, LOOP, NUM, IPX, CCT

4th Dec '19 by Graham Neary

23 comments 7537 reads

Good morning!

Lots on the newswire today, including:

Loungers (LON:LGRS)
QUIZ (LON:QUIZ)
PCF (LON:PCF)
M&C Saatchi (LON:SAA)
LoopUp (LON:LOOP)
Numis (LON:NUM)
Impax Asset Management (LON:IPX)
Character (LON:CCT)

Finished at 5.15pm.

This section by Paul Scott:

Loungers (LON:LGRS)

Share price: 205.2p (+4%)
No. of shares: 92.5 million
Market cap: £190 million

Interim Results

Loungers plc ("Loungers" or the "Group") is pleased to announce its unaudited Interim results for the 24 weeks ended 6 October 2019 (the "period").

This is a hospitality sector roll-out, opening 25 new sites each year. It floated in April 2019.

My hospitality sector expert tells me that the management team are very good. After getting my fingers burned with losses on a bars roll out that went wrong, Revolution Bars (LON:RBG) , but seems to be starting to get back on track again, I’ve been a bit reluctant to get involved in another one. Hence I’ve had just a watching brief on LGRS since it floated.

The headlines look fine to me;

In particular, generating LFL sales growth (of 5.4% here) is the key number. Since many costs are rising, especially staffing related, then hospitality sector companies have to be eking out at least some LFL sales growth. In this case, 5.4% is good, and similar to what some of the pubcos are achieving.

The 25.6% rise in adjusted EBITDA is also good, and reflects the expansion capex on new sites. Although the recent changes in how leases are accounted for has distorted the figures, and made analysis more difficult (with no benefit whatsoever from the changes). Hence we’re given 2 different EBITDA figures. It seems to me that the lower figure is the only one that makes sense, since EBITDA really should be stated after all rental costs.

For my purposes, IFRS16 has completely messed up accounts for multi-site companies, rendering them largely useless, unless I adjust out all the spurious numbers inserted under IFRS16;

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davidjhill

4th Dec '19

So Character (LON:CCT) produced interesting results this morning.

As I argued here previously, one key takeaway for me was that the imminent removal of Peppa Pig from its ranges is proving not to be the binary event that was priced. A new range which has a 3 year licence has been agreed. Since Hasbro will have inevitably been consulted this bodes well for some level of continuation after the next 2 years.

Trading was broadly as expected but against reduced forecasts, at 43p eps. Balance sheet is strong with net cash at £6.5m, almost 10% of market cap. Dividend is now 7% and a fairly miserly PE of 9 given the last 5 years the company has traded consistently.

Cash generation is very good. Despite spending £11m on acquisitions and £7m on shareholder distribution they still only took £10m out of the cash pile and increased inventories. Given the in-line update it suggests cash will be back up towards £14m next year! Great return on Capital and Equity in excess of 30%.

As we know it's a difficult market in the UK at present and this is also flagged as expected. What I liked within these results though is the international expansion and growth. This is important if the company is to keep growing.

Looks like a decent recovery play theme for me.

Graham Neary

Andy, Ken, David- thanks for the suggestions! ~Yes, we'll be looking at all of them.

Graham

ken mitchell

Thanks Graham.

Not sure what the thumbs down was for. Maybe the comment about a Tory majority? If it was, I nearly added that it’s market reaction that matters from an investment perspective and not what we might prefer.

Zipmanpeter

Quiz (LON:QUIZ) H1 results show it making slow progress towards a modest recovery over time ....but needs a change in strategy to really take off.

Product is mostly generic apart from cheap glamour wear - think sequins, heavy make up and a lot of flesh revealed. But headline model is still Sam Faiers (TOWIE since 2010). She is now nearly 30. So who is Quiz targetting? Lower income young Mums who still like to party?

Business still has potential if it doubles down on its niche (glamourware) but updates its appeal and pricing position with fresh celebs. This strategy also needs few (any?) stores and can do away with several categories, allowing major cost reductions.

The CEO/controlling shareholder is a long time rag trader who made millions in the IPO. Now need to see if he wants to be a modern, public company businessmen......or if he wants to buy it back and go private again (as I would if I had his squillions).

Opportunity is there as business is still generating £4.9Mn op cash and claims £7.2 net cash at what should be a low point in annual cash cycle.

%GM is back to 62% as worst of the poor/excess stock driven discounts have passed through - although back to selling 75% off in Cyber week ! Tells you brand strength despite spending a reasonable £1.7Mn on Marketing!

Online sales are flat at £20mn overall but +12% on higher margin Quiz website (ie 3rd party sites must be down). Lots more active customers reported (+31%) but ave. order value only around £30; v low vs fixed distribution costs. Must also be vulnerable to rising environmental concerns on 1 use wear and packaging - although I suspect target market are not liberal tree-huggers.

Stores were a disaster at £20mn. Down 11% on flat total sq footage - despite 2 new stores in presumably higher traffic Arndale and Eastbourne and Concessions opened/closed. £7Mn asset & lease impairment hit taken. However, down to 25months ave lease left and (allegedly) on leases renewed all profitable. Still committed to omni-channel model, in part I think to retain achieved scale in part because it is what the boss knows.

International ticks over at £12Mn but this really means Eire + bits in Spain/UAE etc where TOWIE folk go to party!

I still hold after catching a falling knife at its bottom but no longer expect a fast turnaround.

Paul, Just read your summary on Quiz (LON:QUIZ) (better - should've waited!). Marketing issue for Quiz is that their strength/USP is glamourware. Even if you party hard and change dresses each time, you only need so many. Harder to get you to spend more without moving you up in price/item; which is hard for QUIZ since it gets customers in via cheap pricing. Its proven in a specific space but will struggle to grow but it is cheap.

In contrast, Sosandar (LON:SOS) (which I also hold) starts higher priced/item and the brand feels like it can stretch quite far - from original arm-covering fashionable dresses to office and evening party wear to shoes, smart casual (denim) and accessories as well as target a wider age range. Long term much more potential but as yet sub scale and vulnerable.

Interesting to see what happens on both.

TamzinPiworld

Another Mello presentation, just published. Internet Mobile Communications who are unlisted looking to raise funds.

Described as a FinTech and international telecommunications business. IMC has three divisions comprising International Carrier Services and settlements, Retail and Mobile Marketing, with presence in the UK, Moldova, Chile, India and Malta.

They've doubled revenue and EBITDA every year for 5 years. The raise is being done at a 10.5x multiple on this year's EBITDA, but 4.5x next year's forecast. They pay a dividend, which should double each year.

https://www.piworld.co.uk/2019/12/04/internet-mobile-communications-ltd-presentation-at-mello-london-may-2019/

Howard Marx

"A new range which has a 3 year licence has been agreed. Since Hasbro will have inevitably been consulted this bodes well for some level of continuation after the next 2 years."

How sure are you of this, David?

Firstly Hasbro are not an owner of Entertainment One so why would they have any right to influence the companys' strategy?

Moreover, are there any 'change of ownership' clauses in the contracts signed between Character & Entertainment One?

JDW72

Loungers (LON:LGRS) my only interest in this would be on the short side (but I don't short shares).

The new openings are benefiting from interest associated with them being new (shall we try that new bar?) but I've spoken to many people with far better social lives than me and they were all very neutral on the places - certainly nothing that makes them stand out. A few commented that some weren't in great physical locations, not that easy to get into etc.

Balance sheet is paper thin, operating in a very crowded market with lots of competition, a roll out strategy which is inherently risky and high valuation metrics. I don't think there is a management team in the world that I'd trust to be able to pull this off.

Good luck to them, but I see the risk/reward on this very skewed towards the risk side of things.

Howard

Character (LON:CCT) have an existing relationship with Hasbro. They already licence toys right at the top of the "desired" list such as Stretch from them, irrespective of £ETO. Ask yourself why......the reason is that Character (LON:CCT) are bl**dy good at it.

So, never at all obvious to me that immediately Hasbro take over Entertainment One (LON:ETO) that they get rid of Character (LON:CCT) for Peppa. At least not in the medium term.

Re the new contract for wooden Peppa toys. Would you sign a new contract where you developed a range of toys and associated IP knowing that the company in question was shortly being taken over if there was a 'change of ownership' clause in it? I definitely wouldn't and Character (LON:CCT) management are far from stupid. So whilst I can't say for certain one doesn't exist I'd be absolutely staggered if there was anything that allowed Hasbro an immediate out post takeover.

Having been on the other side of a takeover I know only too well that the company acquiring wants influence over decisions that are not short term in nature. I'd say a 3 year contract is likely to constitute something Entertainment One (LON:ETO) agree to run past Hasbro management. In fact I'd go as far as saying it is likely that the extension to the original licence was also agreed with Hasbro as they will be keen to avoid disruption to the brand merchandise during the integration.

Irrespective of Peppa my other previous comments on Character (LON:CCT) replacing any potentially lost revenues with new brands / geographies is also showing signs of life. The Goo Jit Zu, 2 in-house brands and international expansion is all focused on by mgmt and where the future growth is.

leishylegs

Hi JDW,

Re: Loungers Loungers (LON:LGRS) - Interesting thoughts that chime with my experience, which I thought I'd briefly share.

I recently visited my local one and although the food was ok, and the staff were good, the venue itself was quite disappointing and underwhelming and both my other half and I decided it was not a venue we would be rushing back to given the choice available at comparable prices.

So, based upon my own experience, I think your take on the new sites generating some initial interest may have some weight to it.

Richard

Jim Wall

Hi David - i agree that the contract announced today and the prior 6mth extension were likely agreed to by Hasbro management and given prior Hasbro/CCT co-operation that the market was likely being too negative. however - and please note i am quite long here - i have yet to see much positive re: Goo Jit Zu.. happy to be wrong here since they own the IP too..

jombaston

Impax Asset Management (LON:IPX)

I am very encouraged to see that the large and prestigious investment mandates that Impax have been targeting are now flowing through. They already manage money for CALSTERS (California Teachers - one of the world's largest pension funds) and are getting the seal of approval from influential investment consultants (eg. Mercers).

The year-end AUM of GBP 15.1bn is old news but they were up to GBP15.7bn by end-Nov with some GBP0.5bn of net inflows. What is more, there are material mandates in the pipeline (awarded but not yet funded). I would assume this would include the Formuepleje (Danish fund manager) and Mercers. These are around £100m each. This size of mandate is no longer unusual for Impax.

I haven't yet crunched all the numbers but its pretty clear that with this business momentum the forecasts for next year (certainly the Stocko 2020E revenue) are far too low. Indeed, the run rate will already be above the 2020 full year forecast. Of course, there could be a sharp fall in the market but I don't think this was the basis of those predictions!

lukegallienne

Hi Jim, I don't hold CCT (although it has been on my watch list for a long time and today's results are pushing me closer to the buy button) but my 6 year old son recently asked for a Goo Jit Zu for his birthday, it was at the top of his list and according to him a number of his friends at school are after one for Christmas (admittedly he does talk a lot of rubbish so the source isn't 100% reliable). Personally I don't see the appeal of it, but he is very happy and I guess I'm not the target market.

bohenie

Accsys Technologies (LON:AXS) - some time since you have commented on this company - there is a share placing on currently and seems strange to me - but the shares can be purchased in the Mkk for less than the placing price - (98ish v 105p) - Any thoughts / comments please ?

FREng

Accsys Technologies (LON:AXS) What's the bull case for investing in this indebted, loss-making company?

Thanks Luke - that's really useful feedback to hear. A sample of one may not be statistically representative of course but it does back up the Character (LON:CCT) boards assertion that it's a top Christmas list seller in the target market. I have to say I have followed Character (LON:CCT) for a few years and I have always been impressed with managements ability to distribute toys that consistently make the desired list. I think they are very much misunderstood as a company.

Superb updates yet again today from both Graham and Paul. I don’t know how they mange to absorb and then pass on so much invaluable information day after day. It’s a brilliant service and more than worth the current Stockopedia subscription. Yet there is so much else on this site too effectively in for free.

I was particularly interested in the Numis update and comparisons with Cenkos as I hold both (Cenkos at 40% loss, and average down at break even). .

Can’t really fathom the 11p Numis share price rise today. Consolidating sector so maybe on bid hopes? Otherwise and bearing in mind Graham’s detailed analysis and Numis eps now only 8.8p with PE approaching 30, recovery does already looks priced in.

Cenkos otoh looks cheap by comparison including share price to book value. A recent Edington note said it is just x1 for Cenkos and possibly at all time low, whereas, as Graham pointed out, Numis trades at substantial premiun to book value. Also if held Cenkos yields 10%. Cenkos have been winning and losing business so jury out until next results, but could also be a bid candidate? And Cenkos share price is down over 80% since peaking around 240p in April 2015, whereas Numis share price now is similar to where it was in 2015. It peaked around 440p in June last year, so again compared with Cenkos that 45% fall since then is much smaller. So a lot of bad news priced in already for Cenkos, and unlike with Numis recovery isn’t.

re: Character (LON:CCT), thanks for the super comments which put my own to shame! G

Trident

It was interesting presentation. However, as one party commented they don't file full accounts at Companies House, only exempt accounts, with a balance sheet only. And on that basis its difficult to match their quoted figures with published figures. For example EBITDA is quoted in the presentation, but as we know EBITDA is adjustment city for some companies, and maybe so in a software trading platform, as they appear to offer.

There could be a variety of reasons for filing very limited accounts that, but frankly their response seemed muted in the presentation.

It would be interesting to see the cashflow analysis to see how they fund the dividends they offer, and how close to their quoted EBITDA the cash generation is.

Could be a cracking opportunity, but without more analysis of the accounts, I wouldn't be inclined to invest. But it looks like they fully funded this round of investment anyway.

Whereas this sort of business in prospect would have been a slam dunk for a public quotation at one time, the cost of and uncertainty of getting a public quotation in current markets would not be feasible, as my City friends say the public markets are dead at the moment for IPO's.

Private Equity are short of deals also, with the pause button being pressed because of the General Election, and uncertainty hovering of who might get in.

Gromley

I had a wry smile about the M&C Saatchi (LON:SAA) "revelations" today.

When they first(?) announced the issues back in August - I got quite exercised about their inaccurate disclosure. (From a PR company - surely not?.)

What had got me riled was the statement : "That was in late May 2019, and was published in the Annual report on 29th May."

In fact I could find no reference to this in AR, so it seemed to me that they were trying to brush this under the carpet - "old news" , "nothing to see here, please move along".

They got a bit "rattled" by the market reaction (25% fall) to their new so issued a "Further Trading Update" which in particular said :

The Company reiterates its guidance from 12th August 2019 that the Board is confident that it will meet expectations of operating profit for the year

With hindsight "they protested too much". (lies upon lies?)

Back in August I was minded to write an "exposé" on their misleading statements, but decided I did not really have enough to go on. If I had followed my gut on this one I would be looking quite clever.

If I had followed through with a short I would probably also be looking quite tanned by Christmas.

I won't disclose on whether I would have spent the proceeds on a brief trip to the sun or a full course of Skinny Tan [DISC : I own shares in Innovaderma (LON:IDP) ]

I cannot claim kudos for reading this one, because (i) I hardly told anyone and (ii) I did not act on it.

However, perhaps the lesson is : if you find reports lacking honesty then run for the hills (or go short).

Meanwhile, I could not invest here while the current directors are in place.

Small Cap Value Report (Wed 4 Dec 2019) - LGRS, QUIZ, PCF, SAA, LOOP, NUM, IPX, CCT

Loungers (LON:LGRS)

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Graham Neary

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