Small Cap Value Report - Wed 5 June 2019 - CARD, IGP, GMD, FLO

Wednesday, Jun 05 2019 by

Good morning, it's Paul here.

Apologies, I ran out of time & mental bandwidth yesterday afternoon, and couldn't finish the section on VP Group.

7-8am quick views

Card Factory (LON:CARD)

Q1 trading update

Card Factory, the UK's leading specialist retailer of greeting cards, dressings and gifts, announces a trading update for the quarter ended 30 April 2019 to coincide with its Annual General Meeting to be held later today. 

I reviewed the most recent accounts (FY 01/2019) here, concluding positively that this is a highly cash generative, good quality business, paying excellent & sustainable (in my view) high dividends. Stockopedia's computers like it too - a high StockRank of 94.

Key points are self-explanatory;


Weak prior year comparator period - how refreshing to see a company be honest, and admit this in an RNS. This boosts my level of trust in management.

  • Total 979 stores - must be nearing saturation in the UK? Maybe not, as 50 new stores planned for this year
  • - good start to the year (no figures given)
  • Getting Personal - still struggling
  • Net debt of £151.3m up 2.4% on a year earlier

Outlook comments sound reassuring;

Card Factory has seen a positive start to the year.  Considering the uncertain macro outlook and the continuation of challenging consumer conditions, and with the key trading periods still to come, the Board expects LFL sales for the year to be marginally positive, with full year profit expectations remaining unchanged....
"Overall, Card Factory remains in a strong position, continuing to grow market share, with lessening cost headwinds and a platform for medium term growth." 

My opinion - it's clearly doing something right, to be generating positive LFL sales, in an environment of falling shopper footfall (although that's likely to stabilise at some point, we just don't know when).

I particularly like the comment about "lessening cost headwinds"

Valuation - at 193p currently, the PER is just over 11. That feels good value, for a robust business paying a big divi yield. Although how much upside is there, given that earnings have been falling in recent years? EPS was c.20p in 2015-2018, but now seems to have settled around 17p (2019 actual, and 2020-21 forecast).

The main reason to hold…

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Card Factory plc is a specialist retailer of greeting cards, dressings and gifts. The Company operates through two segments: Card Factory and Getting Personal. The Card Factory segment retails greeting cards, dressing and gifts in the United Kingdom through a network of stores. The Getting Personal segment is an online retailer of personalized cards and gifts. Its physical store network operates in three areas: single cards, non-card items and Christmas box cards. Its single cards include individual cards for everyday occasions, such as birthdays, anniversaries, weddings, thank you, get well soon, good luck, congratulations, sympathy and new baby cards, and seasonal occasions, such as Christmas, Mother's Day, Father's Day, Valentine's Day, Easter, thank you teacher, graduation and exam congratulations. Its non-card offerings include gift dressings, small gifts, party products and other non-card products. The Company operates through a chain of approximately 800 Card Factory stores. more »

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Intercede Group plc is a United Kingdom-based software and service company. The Company is engaged in developing and supplying of identity and credential management software. The Company provides MyID software, which is an identity and credential management system that enables organizations to create and assign trusted digital identities to employees, citizens and machines. Its MyID software protects the networks, facilities and intellectual property of governments, agencies and other enterprise customers. In addition, it provides MyTAM, which is a cloud-based service that provides Android application developers and service providers to deploy trusted applications to the trusted execution environment (TEE) on mobile devices. It offers its solutions to various sectors, including aerospace and defense, finance and telecommunications; governments and federal agencies, and mobile developers. The Company operates in the United States and the United Kingdom. more »

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GAME Digital plc is a retailer of video games. The Company operates approximately 580 stores across the United Kingdom and Spain. The Company's segments include UK, Spain, and Events, Esports & Digital. Its UK and Spain segments are engaged in the sale of hardware, software, accessories and digital. Its Events, Esports & Digital businesses include SocialNAT and Ads Reality Limited (Ads Reality). The Company's activities include multichannel retailing and merchandising; supply chain management and distribution; software and technology development; marketing and customer relationship management (CRM); sourcing and procurement from suppliers, as well as range of individual customers; event management and production, and training, development and employee engagement. The Company's subsidiary undertakings include Game Retail Limited, Game Stores Iberia SLU, Multiplay (UK) Limited, Game Esports and Events Limited, and Game Digital Solutions Limited. more »

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

43 Comments on this Article show/hide all

Brookeda 5th Jun 24 of 43

In reply to post #480896

Thanks for sharing.

Flowtech Fluidpower (LON:FLO) need a boring year or two delivering on organic, growth, paying down some of the debt and bringing efficiencies into the current businesses.

As long as they do that I can see further upside on their recent increases. After that they can go back to shopping :-)

Note I am long on this and continue to see it as a good company who got burnt a bit last year trying to bring in too many companies at once

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lukegallienne 5th Jun 25 of 43

Card Factory (LON:CARD) is the type of company I think is very interesting at the moment i.e good quality but at a reasonable price having been pulled down by the general negativity surrounding the retail sector. The market for greeting cards seemed to be something of a dead duck going back a few years but has proved quite resilient. A Card factory store opened in my town a few weeks ago and seems fairly busy (incidentally it has positioned itself within throwing distance of both a large Paperchase and a Clinton's Cards - surely they can't all survive?) 

It also has that very attractive dividend and considering a FCF yield of >9% it looks to be safe for now as alluded to by Paul.

Having run through the figures from the last annual report and today's TU this morning I have noticed a few areas of concern that are preventing me from opening a position in this one at the moment.

- Operating margin has fallen yr on yr for the past 4 years (from 23.30% to 16.24%)

- NTAV is -£92.40m (maybe more now net debt has increased) as Paul alluded to in the last report on this company this is not such an issue as receivables are almost not existent and cash generation is so strong, however in a market like today's where uncertainty lurks in the background why take the risk on a company whose balance sheet is not rock solid.

- Expanding on this net debt at £151m is around 2 x operating profit - not a deal breaker but hardly ideal.

- Whilst on the face of it ROCE looks very good at 18.50% CARD has quite a large operating lease commitment c. £167m (admittedly this is weighted more heavily towards shorter term leases which is desirable) When factored in the lease adjusted ROCE come down to 10.53% and as with operating margin is on quite a steep downward trend from 22.50% in 2015)

I may well be being overly cautious with this one but perhaps it isn't quite as rosy as the 94 stock rank might suggest.

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rmillaree 5th Jun 26 of 43

In reply to post #481046

888 Holdings (LON:888)

Nice to know i am not the only madman who picked up shares yesterday  (mad as in the chart was not saying buy lol)

But I note they spent 12m on intangible assets and similar in 2017 so I suspect the real OP cash is 54.7m which just covers the dividend.

I wouldn't necessarily agree with that - its made a bit messy by  the currency translations etc- i have done my calcs coming from a different angle and here they are.

If we say eps is 11.5 p and dividend per share is 8.8p - thats a surplus of 2.7p per share  - say £10 mill surplus. caveat i am presuming  EPS quoted is after including amorisation total !! - i don't know that for certain.

they might have spent 12 mill+ on intangibles but there was a matching amortisation charge in the accounts which makes neutral situation. I would say its an unknown though what they need to spend each year in that regard to stay still - hopefully purchases will add to earnings rather than just keep them stable who knows.

Being a bookmaker i would expect the basic cash conversion of profits to be a given - so that only leaves other items which make the difference and i would presume they are more one of in nature and can be excluded? Looking at last year these included $40 mill cash going out in reduced customer deposits  and reduced trade payable  - these two totals have been factored in before arriving at the $42.1 mill for the year and i would deffo see them as being ignored as swings and roundabouts numbers so adding them back cashflow. I guess that would only leave "exceptionals as the fly in the ointment in the unknown stakes" - as i am guessing they will be after the quoted eps - but i don't know that for sure.

Final Note based om 368 mill shares and dividend of $12.2 cents - that only comes to cash cost of $45 mill - or £35 mill  - so it looks like the cash payout of dividends in 2018 was more than 100% of the voted divi too.

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nicobos 5th Jun 27 of 43

GAME Digital (LON:GMD) for those that haven't seen - Mashley has made an offer at 30p for the Group.

"The Offer of 30 pence in cash for each GAME Share is final and the offer price will not be increased."

Seems a bit tight ! Any views?

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Gromley 5th Jun 28 of 43

A bit of a bolt out of the blue as far as I am concerned.

Sport's Direct have just acquired c. 15m Shares in GAME Digital (LON:GMD) from Marlborough UK Micro-Cap Growth Fund taking their holding to 38.49% and forcing a mandatory bid at 30p / share.

I had been very sceptical of the idea that Mike Ashley would go above the 30% and bid here , but clearly I was wrong. Shareholders that were banking on a bid however I think were hoping for something quite a lot higher.

No position here, but it will be interesting to see how that pans out.

(Ha I see nicobos beat me to it)

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Johns54 5th Jun 29 of 43

What is mental bandwith?



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jwebster 5th Jun 30 of 43

In reply to post #481086

888 Holdings (LON:888)

Yes, actually the cash dividend payments cross reporting years so the 56.6m paid is really the higher 2017 dividend number as:

An interim dividend of 4.2¢ per share was paid on 31 October 2018 (US$15.2 million) and a final dividend of 5.9¢ per share plus an additional one-off 5.6¢ per share were paid on 11 May 2018 (US$41.4 million)

So the 56.6m relates to USD 15.7c per share. Yes, a reduced dividend of 12.2c will cost around USD $45m

Agree the customer cash deposit movements shouldn't be counted so add back $12.1m but maybe subtract a similar amount for the annoying items buried under "Cash flows from investing activities" which eat up a similar amount.

All in all, the 2018 12.2c dividend looks well covered by cash

As for reading charts, well, on that programme we would would have to wait months for a flat consolidation period on low volume to slowly shake out weak hands until gone. As that hasn't happened, I'm prepared for the fact 888 share price will be jumpy all over the place as weak hands will be keen to sell any rips I'm sure.

This is one to buy and hold as only proven cash generation combined with good div's will consolidate the price, how long will that take? Could be a while yet. I don't know but figure the odds are ok at this price point.

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Cowlid 5th Jun 31 of 43

GAME Digital (LON:GMD)

Well that’s a 30% profit on my small speculative holding, but hasn’t Ashley got this dirt cheap????


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rmillaree 5th Jun 32 of 43

GAME Digital (LON:GMD)
I hope Ashley has £350 mill flowing into his coffers in the next week or so - so that he has the money to pay for GMD - who would have believed his one decent big investment that seems to be doing ok nowadays is a football club.

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fwyburd 5th Jun 33 of 43

Re GAME Digital (LON:GMD)
I've been commenting here for a while about SPD's increased holding a few months ago and now we know why. Personally I was hoping for 40-50p which was why I accumulated so many shares since the big drop (after their abortive attempt to move out of AIM) but it's a done deal now so time to move on.

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fwyburd 5th Jun 34 of 43

Thanks for your write up about Intercede (LON:IGP) Paul,
If anyone is interested, the broker note from finncap is here .

They reiterate a target price of 80p (unchanged from the last note at the time of the trading update).

The chart shows resistance around 42p which I suspect will get broken on any more positive news.

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cholertonandrew 5th Jun 35 of 43

Re Intercede

Just wanted to add my thoughts on Intercede as I’ve been a long term holder.

I think these results are good and they have the potential to grow from here. Some of the growth opportunities include: winning further business in Asia, Federal users putting their existing credentials onto mobile devices and Intercede are well placed to win further business here (these are referred to as derived credentials in the report) and they have further opportunities to sell mobile solutions to a country’s citizens where a government will be the customer. In the last case , a citizen will use Intercede’s authentication solutions to authenticate to government websites or apps and possibly to authenticate to other sites such as banking too. This seems exciting to me.

For the sake of balance, Intercede have cut their staff numbers strongly over the last year or two. They were previously exploring the opportunity to step into some very wide markets with their solutions targeting widespread consumer authentication on the internet when using mobile devices and authentication of devices within the internet of things. The CEO says a little on this in his report. It sounds like such breakout opportunities are not imminent and may have receded in probability but they could remain a possibility for the future as the market evolves. Intercede does work (closely I believe) with some major players in the cyber security space such as Gemalto (now a part of Thales). That could stand them in good stead should the wider market move towards an embrace of PKI (public key infrastructure- their technology is based on this architecture) solutions. Even without any such breakout opportunities, it sounds like they have growth potential over the medium term.

I continue to hold.


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mojomogoz 5th Jun 36 of 43

GAME Digital (LON:GMD) just another nail in the Sports Direct coffin.

Keep moving and reality can't catch up with Sports Direct and trader Mike. When reality does drop by perhaps the plan is to be TBTF and get bailed out :O

TBH it could be genius strategy that is hard to see through the fog as there will be a future for the high street

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fwyburd 5th Jun 37 of 43

In reply to post #481116

Hi Johns54,

I've been mulling your question this afternoon amid all the exciting news flow.

I can only surmise that Paul had depleted his cognitive powers and needed a rest. 

Alternatively, he could have run out of his supply of the pharmaceutical he takes to aid his analytical abilities, (street name "Mental Bandwidth"), and so was unable to continue his analysis. 

Who knows. 



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mojomogoz 5th Jun 38 of 43

In reply to post #480976

I look on with jealously and incredulity at Bidstack (LON:BIDS). A friend of mine backed it in angel round...beers on him.

£75m with reported revenue for FY18 of £300k.

This year they have raised some more and doing a lot of hiring. Raised £5m cash. Very likely they will need to raise quite a bit more before they get to profitability as there's a lot of operational capability to build out to support the tech.

This was the quickest every UK from seed to listing stock. That seems a bit trophy exercise to me....however it could be a genius founder taking no prisoners. Defo an area to move fast

They are on an advertising bidding platform but its with a startup company rather than something big and established.

Their thing of putting ads onto billboards in games is cool....but its yet to be proven as very effective and yet to establish a value for advertisers...will they pay a lot or is it something minimal and OTT synced adverts with other devices on same wifi the dream advertising space for the distracted generation?

For my sins I own Taptica International (LON:TAP) (buying at this kind of price so not been rinsed.....yet!). The whole space is very high flux and hard work to gamble is that TAP now how to do it and have a product suite that has value and good way to target customers

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mojomogoz 5th Jun 39 of 43

In reply to post #481036

Hi rmillaree

I am not PCF (LON:PCF) expert and take my comments as loosely informed. I have spoken with CEO and I'll stick by my comment that he's selling his stock hard....not necessarily bad but does mean he's pushing this expectation.

I will try to look when I have time. Don't find reference to financing facility based on quick word search. They look to me like they will need financing sooner rather than later due to pace of their growth. That said they have taken on some shorter duration business I believe so that should see liabilities reverse of balance sheet.

Strangely, they could run into duration mismatch in an odd fashion in that they could find the duration of their customer deposits longer than some of their short term financing they are looking for growth through....this suggests they are going to look to tap interbank market for more of their financing again.

The margin of safety looks fairly narrow so any hiccups from rapid balance sheet expansion (or economic cycle woes) might be challenging.

I could be very off beam. I should look. I'm only likely to invest in this situation when I can see a prob and understand how they deal with it otherwise its hard to get grounded on the quality of their growth.

I own 1pm (LON:OPM) (bought around this price earlier this year and late last). Its got challenges that people have pointed out. Interestingly they did not grow lending as much as they could have wish was a conscious decision but also shows restrictions on their funding capability (a negative and risk for them). But I was more interested in this than PCF as I like the credit risk they have more. IMO they are asset back lending to businesses that are higher credit rating than they are officially given but if you are small company you are given very high risk rating (like sub prime) - so the earnings is in the spread rather than the leverage. CEO Maybury at PCF disagreed with me on this and claimed there was no effective credit spread difference with them and OPM ....but as a bank I don't think this can be right as capital requirements influence what quality you can lend at. The result of this is that I am suspicious that PCF will lend to similar quality businesses but at lower spread as they are forced to by regulatory framework they are in (got to rate the business lower risk to make the loans than OPM do). This could cause negative surprise to PCF....and I note their impairments went up!

Make sense? I might be wrong but I feel there's value and margin of safety in OPM....of course there is funding risk

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abtan 5th Jun 40 of 43

In reply to post #481141

Hi Francis

Re GAME Digital (LON:GMD) I too thought 30p was a done deal until I saw management's response for holders to do nothing for the moment!

Does anyone know if this is a normal response? I would have thought, like you, that it was pretty much a done deal.


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fwyburd 5th Jun 41 of 43

In reply to post #481191

Hi Abtan, I don't know the answer to this. Ashley has 38% so it depends if he can force this through at whatever price he wants. Paul reckoned this was a done deal but perhaps management can summon the votes to get a better deal; problem is, I don't think (given Ashley's Belong deal and existing shareholding) anyone else will bid. If they've reduced their cost base and performance of the retail estate has improved, even without any material progress with Belong rollout (I reckon SPD are holding Belong back), the buyout price would be much higher. So the timing is astute from Ashley as results not due until August. Who knows how this will play out?
Back to Love Island!

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Cleeve 5th Jun 42 of 43

In reply to post #481176

I actually sold half of my BIDS today in a rare moment of sensibility! It could be a well ramped stock but the story is good and makes sense however we need to see some traction and real numbers - I can understand how big the market could be but just have no idea if the wholething is viable. My problem is that it was not ahuge investment, I sometimes buy small amounts as a memory bank aid, I did it with Tarsus a few weeks ago and never increased my holding which is typical. Anyway if it goes to zero tomorrow I have taken enough out to have amde a profit so it will not feel to awful!

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Gromley 5th Jun 43 of 43

In reply to post #481191

Hi Abtan & Francis,

FWIW I put some additional thoughts over on the Game specific thread

To answer the specific question though, the management response is entirely normal - "do nothing for now, we will give you our opinion in due course." (You can't I believe accept the bid yet until the offer document is circulated in any case, although you could sell in the market at a small discount.)

The only thing this really tell us is that the bid was not discussed with management in advance.

Personally I don't think it is a done deal yet - I cannot see there being a counter bid but it is possible that not enough shares accept the offer to get to the 75% where they can be de-listed.

So, discounting a counter bid the three outcomes are :

1. The bid fails to get to 75% and the shares remain listed  - but you'd be holding a share where Ashley / SPD has substantial influence if not control.

2. The 75% threshold is reached and the shares de-list  (Usually I think there would be an opportunity to sell once this has become apparent and before the de-listing)

3. The 90% threshold is reached and any unbid shares are subject to compulsory purchase.

Shareholders have at least up until the first closing date of the bid to make their minds up.

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

About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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