Small Cap Value Report (Wed 6 Mar 2019) - HEAD, CAMB, ANP, RBG

Wednesday, Mar 06 2019 by

Good morning, it's Paul here!

Please see above the companies which have caught my eye this morning.

Market conditions for small caps still feel very depressed. The UK small caps space seemed to have a nice bounce in January, but a lot have slid back again. Bad, even only slightly bad, news continues to be punished severely. I think that's mainly because there's a buyer's strike, until we know what's happening with Brexit. So some prices are falling too far, below what makes sense.

Selectively, I see some obvious & compelling value. Today's buyer's strike could well be tomorrow's buying stampede. It's market conditions like we have currently, which lay the groundwork for some big future profits, in my experience. I could trot out that Buffett quote about fear & greed, but everybody already knows it, I'm sure.

It all depends though, on where we are in the economic cycle? This recovery from 2008 looks very long in the tooth now. Is a global recession coming? The recent major recovery in the US stock market suggests otherwise.

We've had 10 years of ultra low interest rates, which has supported equities. What's to stop us having another 10 years of low rates? Will they ever normalise? It's really difficult to know where things are heading, which in turn makes it difficult to value shares.

EDIT: a friend has emailed me several articles, showing that housing enquiries in London are up, and that there is very positive data on construction of high rise buildings planned, especially in London. This is strengthening my growing conviction that we could, perhaps, be on the cusp of a post-Brexit boom. Even if it's a complete muddle (looking very likely), the removal of uncertainty could unleash a backlog of investment. Hence I'm back in buying mode, in terms of my small caps portfolio.

Headlam (LON:HEAD)

Share price: 420p (up 0.5% today, at 09:43)
No. shares: 84.6m
Market cap: £355.3m

Final results

Headlam Group plc (LSE: HEAD), Europe's leading distributor of floorcoverings, is pleased to announce its final results for the year ended 31 December 2018.

This looks a mature business (i.e. little growth in profit), and is priced accordingly, so it's a value share. It has grown historically by making lots of acquisitions, funded from cashflow - quite a nice business model.


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Headlam Group Plc is a United Kingdom-based company, which is engaged in the marketing, supply and distribution of a range of floorcovering products. The Company's operations are focused on providing customers, principally independent floorcovering retailers and contractors, with a range of floorcovering products supported by a next day delivery service. The Company operates through 56 operating segments in the United Kingdom and five operating segments in Continental Europe. Each operating segment is a trading operation aligned to the sales, marketing, supply and distribution of floorcovering products. The Company's activities and facilities are located throughout the United Kingdom, France, Switzerland and the Netherlands. Its business in France operates from approximately two distribution centers and over 20 service centers, and the businesses in Switzerland and the Netherlands each operate from a single distribution center. more »

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Cambria Automobiles plc is a motor dealer, which is engaged in the sale and servicing of motor vehicles. The Company is engaged in the provision of car vehicle sales, vehicle servicing and related services. It is a retailer of new and used cars, commercial vehicles and motorbikes. It operates on a dealership-by-dealership basis. It operates from approximately 30 sites with a total of over 50 dealer franchises. It operates dealerships across England, from the North West through the Midlands, down to Kent in the Southeast and across Exeter in the South West, trading under local brand names, such as Dees, Doves, Grange, Invicta, Motorparks and Pure Triumph. Its brand portfolio comprises Abarth, Alfa Romeo, Aston Martin, Dacia, Ford, Fiat, Honda, Jaguar, Jeep, Land Rover, Mazda, Nissan, Renault, Seat, Triumph, Vauxhall and Volvo. It also provides ancillary services. It offers finance and insurance for the execution of the transaction along with service plans to maintain the vehicle. more »

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Anpario plc is a producer and distributor of natural feed additives for animal health, hygiene and nutrition. The Company operates through two segments: UK and Eire, and International. The Company is focused on the manufacture and sale of natural feed additive products to agricultural markets. Its products for the poultry, pig, ruminant and animal feed markets include acidifiers, enzymes, essential oils, pellet binders, antioxidants, mycotoxin binders, mold control products and a range of nutritional premixes and performance enhancers. It offers natural feed additive/flavor called Orego-Stim. It offers its customers a number of omega 3 & 6 supplements for use in feed. Its products in the aquaculture range include growth promoters, immune enhancers and pellet binders for both shrimp and fish. The Company's trading brands are Kiotechagil, Meriden and Optivite, which trade across approximately 70 countries around the world. more »

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

34 Comments on this Article show/hide all

Edward John Canham 6th Mar 15 of 34

Ten Entertainment (LON:TEG)

On the heroic assumption that City Financial might be finished this looked very good value after the fall with a fwd PER of 10, PEG of 0.58 and yield of 6%, so took a punt at 212 p . Looks very good value in comparison to Hollywood Bowl (LON:BOWL) especially as its LfL sales increase seems to be better.

Actually not sure if I'm too bothered if it falls further.


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Camtab 6th Mar 16 of 34

In reply to post #455288

Interesting Phil. My only note of caution would be some of the difference in valuation must be down to working capital. Hollywood has more cash than current liabilities whereas with Ten thats not the case.

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mammyoko 6th Mar 17 of 34

In reply to post #455288

re Ten Entertainment (LON:TEG) City Financial only had 3.2m shares. 10.7m sold today. Somebody else bailing? Woodford?

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Cleeve 6th Mar 18 of 34

In reply to post #455208

Quick question Paul on SOS I understand that 17.8% of the company is under option to management at a lot less than todays price and the board cost £ 1.2 m to run last year - do you feel that these options should be aligned with share holders more rather than deeply in the money freebies?

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simoan 6th Mar 19 of 34

For value investors then, this is an interesting sector to investigate.

One area to look into is the possibility of mis-selling of finance. I read somewhere yesterday that the FCA is investigating car finance. Apparently some dealers or brokers have been given flexibility to change interest rates charged to different customers. That sounds potentially ominous, given the possibility of fines being levied. I'm just flagging this as a risk which readers would need to consider, if buying shares in this sector.

I agree. I've been closely monitoring car dealers of late as they are seriously in contrarian value territory. It looks like the FCA are going to clamp down on the dealers who have been making out like bandits by overcharging interest on PCP finance deals. I read the FCA report yesterday and it is all part of their "treating customers fairly" drive. It seems  customers are being charged interest rates that bare no relation to their credit scores.  So not only could there be fines but it could also remove a source of easy profit.

In addition, if you read the recent Vertu Motors (LON:VTU) trading update there is the concern that the car manufacturers will start to take back in house the spare parts business and use the dealers as little more than warehouses which will remove one of the higher margin revenue streams. Ford have already initiated this and it is likely others will follow.

All the best, Si

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dealtn 6th Mar 20 of 34

In reply to post #455318

To be fair the options granted in Sosandar (LON:SOS) were granted with an exercise price that was in line with the underlying share price at the time (as far as I can see from the accounts with respect to the 15.1p options and the 29p ones recently disclosed). It's a fair point, though, to question whether directors are suitably incentivised, and in line with ordinary share holders.

An exercise price, particularly with an option expiry date of as long as 10 years, could have been set higher than the underlying to "encourage" directors to try and ensure the price was to rise over time. It is misleading though to suggest the options were granted at a price "a lot less than todays (sic) price"

For now it can be argued it is an expensive board, but by remunerating its constituents with equity (and options), this is at least cashflow beneficial. However, like with much to do with this company, it is about the future, not the here and now, and that will be the test of whether they are overpaid or not. I would like to think that future director benefits could be incentivised more than the present ones have been.

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sharmvr 6th Mar 21 of 34

In reply to post #455328

When my sister bought her car (from a BMW dealer), the salesman asked us what we would be able to pay per month.
Effectively the negotiation was on the finance rate, not the price of the car.
Certainly seems ripe for "adjustment".

When I bought my car from Toyota about two years later, they only had one person in the store who could talk you through the finance, presumably because the gentleman had received relevant training.

With respect to finance charges, I am not sure if it would be the finance company or the dealer that would be hit hardest.
Banks have to ensure their products are marketed correctly and need to monitor their agents, and presumably would have provided guidelines on the interest rate. My finance agreement states that Toyota acted as a representative of the finance provider, and for appointed representatives, the compliance responsibility is with the company being represented, not those representing.
Further, credit rating cannot be the only factor when pricing a car loan, since the amount of finance / term / re-sale value would all be subject to the pricing calculation?

Have a small holding in £VTU 

All the best 

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sharmvr 6th Mar 22 of 34

In reply to post #455293

I had a nibble of Ten Entertainment (LON:TEG) in the afternoon too.

They do seem to have a high level of payables, but given the rather large increase at interim, I feel this may be more of a timing issue.
Hollywood Bowl (LON:BOWL) also have better margins, but Ten Entertainment (LON:TEG) growing top line quicker, and I would think that they would achieve the same margins if they get revenue to the same level as Hollywood Bowl (LON:BOWL).
Better growth runway too, although from what I can tell, Hollywood Bowl (LON:BOWL) are better at generating sales / profits per centre.

Would be surprised if Woodford is not having to fund more redemptions - if I understood that transaction correctly, his investors have had to retain poor performing investments at a 40% post tax premium. New Patient Capital issue would have received VCT rebate I think?

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jonesj 6th Mar 23 of 34

In reply to post #455273

Thanks. Whilst I wasn't exactly looking for it, you will never guess who their auditors were......

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Cleeve 6th Mar 24 of 34

In reply to post #455338

Thanks for clearing it up re option price and strike prices etc however it is a volatile share price and so surely this should be taken into account when granting options but maybe it was done as an average for several weeks I would like to see options granted at higher prices rather than in line with the price of the share when they were issued - I am all for incentives but they need to be aligned to a moving SharePrice so that share holders and directors interests are one and the same. My wife feels the clothes look low end, she liked only 2 items but having said that there is money in mass market products but they may be aiming at a different segments to what they feel they are actually hitting. I do think it is a stock that you can trade it seems to sell off at high 30’s and a floor around today’s price.

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Paul Scott 7th Mar This post has been moderated
janebolacha 7th Mar 26 of 34

In reply to post #455408

"Do your own research, don't waste my time with crap like the above.


EDIT: Fool. Just read the Annual Report. Joint CEOs are on c.£120k each. Your £1.2m figure is nonsense. Work out the numbers. Don't peddle lies. Idiot."


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Beginner 7th Mar 27 of 34

In reply to post #455433

Paul posted at 0217. We may need to have a whip round and buy him a time lock for his keyboard. It is no excuse, but I think we could all benefit from taking some time away from our screens, and keeping sensible hours.

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beatingmrindex 7th Mar 28 of 34

In reply to post #455408

Paul, that's absolutely uncalled for especially when you repeatedly asked for the community to lay off personal attacks.

Additionally I would be very suspect of a board that consists of 2 CEO's and no additional input from other areas of the business.

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Effortless Cool 7th Mar 29 of 34

In reply to post #455518

Yes, I think that Cleeve makes some very pertinent points regarding Sosandar (LON:SOS).

What looks like grossly excessive non-executive remuneration, combined with grossly excessive share awards to the two senior executives, is not something that sits at all comfortably with me.

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gus 1065 7th Mar 30 of 34

For the record, on the subject of the Sosandar (LON:SOS) executive remuneration, the 2018 annual report (page 53) shows the joint CEOs are indeed paid a salary of £118k each (Paul’s correct) and the total board expenses (7 people) were £1.235 million) (Cleese is correct). This includes £500k paid as “Fee Shares” to three members of the board (not including the two CEOs) so possibly one time payments as part of the corporate reorganisation rather than an ongoing annual expense.

15 all, although perhaps Paul loses the moral high ground for posting after Pironi-o’clock. Been there, done that myself many times ....


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rmillaree 7th Mar 31 of 34

Sosandar (LON:SOS)
I am reasonably confident the apparently excessive remuneration is not as bad as it seems at first glance.
What is relevant is what is the policy going forward in this regard with regard to remuneration and options.

what he have to remember here is that the company floated in the year in question - so the quoted remuneration includes practicably speaking a payment that relates to the floating of the company and that has inflated the yearly total massively. There is nothing wrong here and its all in the listing document so no one should be surprised we are where where are after doing proper research.

Looking at the numbers in question the listing document makes clear that there is a 500k fee in this regard. It is probably to the benefit of all involved that the directors took what they could in shares so there was the maximum cash flow left to invest in the business.

Also with regard to the salary levels they are massively higher in the period pre-float so i would kinda guess that Pauls 120k quoted figures will probably be closer to the mark albeit they could have any number of extras on top that we would need to directly ask the company about.

Note my assumptions my be wrong - i have just filled in the blanks guess wise by looking at the listing document and annual report.

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intuitive6191 7th Mar 32 of 34

In reply to post #455328


You would seem to be correct. See link below for further detail

Disclosure - held Vertu, but no longer

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simoan 7th Mar 33 of 34

In reply to post #455588


You would seem to be correct.

Well I would hope so because I read the full FCA report rather than the Daily Mail :-) I am finding the cheap metrics of the car retailers difficult to resist currently. I have made seriously good money on them over the years but I'm slightly more cautious these days and I find it difficult to get my head around investing in any kind of cyclical distributor type business with such low margins. The accepted wisdom is to buy such businesses when earnings have collapsed and recovery is imminent so the PER is high not low.

And in common with many other distributors they are squeezed on both sides i.e. the debt laden consumer on the one hand and the car manufacturers on the other. The fact they need to use such dubious practices as outlined by the FCA tells you everything you need to know about the quality of the business. And these days I am more interested in investing in quality businesses.

All the best, Si

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Edward John Canham 8th Mar 34 of 34

In reply to post #455303

Ten Entertainment (LON:TEG)

City out, Woodford increases stake (?!).

Lot more shares not covered by these two notices.


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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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