Small Cap Value Report (Wed 8 Nov 2017) - TRCS, SDM, JPR, MKS, JDW, PSN, PVCS, ZZZ

8th Nov '17 by Paul Scott

77 comments 23878 reads

Placeholder article posted the night before:

Hi, it's Paul here! A quick reminder that Tracsis (LON:TRCS) results will be out in the morning. I am interviewing the CEO, John McArthur, this Thurs. So if you have any questions, please email them asap simultaneously to me & John, using both the email addresses below;

Paul Scott: QSCquestions@gmail.com
CEO of Tracsis: J.McArthur@tracsis.com

I'm trying out an email system, as it saves me the hassle of having to set up an online form. Also it means that me & John both get to see the questions at the same time, so eliminates preparation time for me.

Please note that I added more sections to yesterday's report in the evening. So the full report now includes all the shares that were originally in the header.

Here is yesterday's completed report, to start you off with. It includes sections on;

Intercede (profit warning)
FeverTree (materially ahead of mkt expects)
Blancco Tech (results)
Johnston Press (EGM requisition - which has since been declared invalid by the company)
Ideagen (trading update)
Castleton Tech (interim results)
UP Global Sourcing (final results)

I mention this because I was writing very late last night, so readers may not be aware that more sections were added.

Good morning! It's Paul here for the usual small caps report.

I'll also briefly comment on some bellweather large caps today. I think it's well worth keeping an eye on what's happening to consumer-facing, and residential property larger caps. This can often have read-across for smaller caps, and helps me understand where the economy is going - vital information for deciding whether to buy or sell particular shares. I don't see myself as a bottom up, or top down investor - I do both. You have to, otherwise investing decisions wouldn't make much sense.

Marks and Spencer (LON:MKS) - interim results. Adjusted PBT down 5.3% to £219.1m. However, growth in international profits masks a 17.8% fall in UK adjusted operating profit. A stand-out bad number is that store staffing costs in the UK rose 10.3% to £532.5m - I think some of that is pensions cost related, but it's still a startling number. LFL sales growth is elusive, but costs are rising. So I'd be more inclined to go short, rather than…

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Sutherland

8th Nov '17

Ramridge. Thank you for your reply. I will look at the company again. I can live with the building sector for the time being but I have noted your comment on liquidity which I will investigate for my self.

Paul Scott

9th Nov '17

Graham,

You can't do that!! (comparing LFL sales performances for companies which are reporting on different periods).

The point is that very recent LFL sales (which RBG hasn't yet reported) appear to be strong for its competitors Deltic, and the less comparable Wetherspoons. Therefore RBG could also be reporting strong LFL sales growth too? Halloween seems to be a much bigger party event now than in the past.

Regards, Paul.

GrahamF

Hi Paul.

I did make the point that these are for different time periods so not exactly comparable. Yes, I happily concede that as we don’t know RGB’s recent sales numbers they may have had a much better hallowe’en than last year. However, the management have been focused on trying to negotiate the sale of the business rather than anything else so it’s not particularly likely in my view that they will have suddenly played a blinder on promoting their hallowe’en season.

Furthermore, I think that the very weak long term LFL sales growth at RGB is illustrative of underlying problems with the format. You yourself have said the food offering is poor. Do you not think that anyone acquiring this business will want/need to spend money and time improving the format? As a former numbers man, would you be content operating a business where the existing outlets were likely to be making less profit each year rather than more (as wage, pension, apprenticeship, rates and supplies all increase at a faster rate than the top line)?

MichaelFBS

Hi Paul

I owe you a reply but time got away from me yesterday.

My view of the EU and Brexit is seen through the lens of my business (French Ski Chalet Holidays), magnified by social circumstances (3/8ths of my immediate family (brothers/sisters) are not UK) and magnified again by people I listen to (the list is enormous and includes the likes of Anatole Kaletsky, Tim Harford, Martin Wolf, Lloyd Blankfien, Jim (Brexit would leave Britain poorer) O'Neil, Guy Spier, etc.

My business, that I have spent half a life time building, is able to function because of our membership of the EU and within that the Free Movement of Labour and the Detached Workers Directive. The business could (will is another matter) continue outside of the UK's membership of the EU but in a much transformed form, less profitable, more complex and more expensive for the client. These various hassles/barriers are likely to not make this worthwhile.

Whilst my business is truly niche, it is my belief that almost any business trading within the EU will be, to one degree or another, effected in a similar fashion and will not in any meaningful time frame be able to replace the losses with trade outside of the EU. I am not saying that they will cease trading, or course not, but sales, employment and margins will reduce. If you have been trading with the EU 27 exclusively, it is a whole different ball game to suddenly attempt to replace some (all) of that lost trade with trade to say China, India, Russia etc. Indeed your choice of markets outside of the EU where the trading enviroment, rule of law and infrastructure is as good as that as we enjoy in the EU is limited.

From a trade point of view I just can not see the overall advantage of exiting the EU; even the Daily Express published a graph recently with the title:

"The scariest chart in the world when it comes to Brexit negotiations" with the sub title

"The vast majority of UK trade is conducted under EU, EEA, or preferential trade agreements"

http://www.express.co.uk/news/...

On the Sterling front devaluation has never led to long term economic prosperity. When I started (1991) my business the pound was over 3 Swissies to the pound (in 1976 it was just shy of 6).

The pound would have bought €2.56 (I had to double check when I saw that).

It would have bought Sing$7.35 (Today Sing$1.81)

No we dont know where Sterling is heading but long term I would be short sterling. Additionally it can only go to parity £1 to 1 cent that is.

I, like you I believe, was and am a rapid Thatcher fan (but am now an ex-Tory with no allegiance), a free marketeer (within a regulated structure), but believe that being a member of the EU is not incompatible with these views.

I could go on but we all have better things to do that read my musings but I will leave you with one thought, Howard Marks of Oaktree Capital wrote (not specifically about Brexit I hasten to add!):

"Nobody knows what will happen; Our mantra at Oaktree is “that those who move forward, but with caution, excel”

Brexiting in this fashion is not moving forward with caution. We will not excel.

I will take Marks over Martin any day!

Best wishes

Michael

HHR

10th Nov '17

Thanks for that - I know sdm quite well and I hadn't thought of that until your post but it does make sense to me. However I also think there is something fishy too - the dicrepencies between orders and revenues are huge. I might re-do my analysis using a 24 month lead time and a 36 month lead time. I have noticed other companies reassuring investors with record orders which don't seem to mature to revenue e.g. NCC

Wimbledonsprinter

Mark

I would be interested in what you find. At end- August, as far as I can see, the expectations for 2018 sales were £73 million. Subsequently, Power Pax was bought with annual sales of £3.3 million and and EBIT of £0.4 million - but when the H1 numbers came out in mid-Sept, 2018 expected sales remained at £73 million and Profit expectations only marginally moved up. Now in November, 2018 revenue expectations have come down to £70 million - but management are not really explaining why 2018 expectations (acquisition adjusted) should have fallen by £6 million in the space of less than 3 months. The trading statement seemed mostly focused on sales having been deferred from 2017 into 2018.

But my main gripe about Stadium is that they seem addicted to adjusted earnings. I don't pay attention to them anymore - there have been repeated reorganisation (one-off) adjustments and the H12017 numbers included the cost of hiring the new CFO as a one-off adjustment. Therefore, I focus much more on the cash flow number (and while I accept there are short term issues with component sourcing) the expectations now seem to be for negative FCF of more than £3 million in 2017. But the share price has fallen now a long way - if the company can demonstrate it can generate significant FCF in 2018, I might be tempted to buy.

Fangorn

11th Nov '17

This comment is under review

"Tim Martin also neglects to mention that much of the food imported from the continent is unlikely to be substituted by replacements elsewhere. There will always be demand for Italian parmesan cheese and Parma ham, French Bordeaux and camembert, Greek feta cheese, Spanish chorizo, German lager (the list could go on)."

Drivel - plenty of substitutes for most product categories.Whether it be Wine, Cheese, Bacon, Oranges, Olives ,Eggs etc etc

German lager...I'll take Japanese lager over that any day - Asahi, Kirin, Sapporo
(The list could indeed go on!)

"Yes, in theory these products can be substituted for cheaper imitations from other countries, but in all likelihood the demand is pretty inelastic"

Incorrect.Cheaper imitations implies of lower quality..Simply incorrect.But if you'd lived in ASIA you'd know that. Would go near Tsingtao for example, Singha, but Japanese offerings superb.
Tiger beer is also not bad and I say that as a non beer drinker.

Absent tariffs to NON EU produce we'll import a lot more..and we'll also assist the less well off in this world the opportunity to export themselves to some prosperity.

Most of the goods listed have reasonable substitutionability unless you're a pretentious snob!

Case in point....

1) French Bordeaux! Erm, I'll take an Argie Malbec over that for starters. Or a Shiraz/Durif.

many Pro EU Remoaners havent lived or worked outside of UK/EU - world is an energetic place, much of which emanates from ASIA or North America(Areas where economic growth, prosperity are on the rise)

Plenty of other examples..

Eg. Oranges - Overpriced from Spain,as a result of Cap or better values for money from South Africa or Israel.

I'd take produce from Israel over Spain any day on taste alone..(No, I'm not Jewish either)
Next

I dont understand. Is my 11 year old son not allowed to play rugby and am I not allowed to watch him play?

Your series of comments are pretty unnecessary and bordering on unpleasant.

My mistake of course, I should have stayed clear of the Brexit thing or DM’d Paul.

Anyway he lost the match 6 - 3 if that makes you feel even better but not quite sure why it is a bubble I live in. I started my business in 1993 and at the time had £3.50 in the bank, over the initial 7 years I borrowed £20k from my late mother so that I could survive, in now turns over a couple of million and makes a tidy profit. Is there anything wrong with that? I thought that was what capitalism and investing was about?

Anyway last time I post on Brexit here (possibly post at all) and I will keep my own council but continue to learn from others who post here and hopefully enhance my investing returns in the future (37% in 2016 and 61% this year to date with only 20 or so trades this year.)

PS. Having just read through the posts here and seen that my original post garnered 20 thumbs up which is heartening, (and yours at least a thumbs down or two) I feel slightly more at “home” posting here, so may well continue to do so and just skim over your posts.

Murakami

12th Nov '17

No more politics please, this is an investing focused site, any more overtly political posts will be moderated by the site admins and may lead to a site ban. Thanks, M

15th Nov '17

Hello WimbledonSprinter, I think your first para is effectively another way of saying what I was originally getting at - it's unwise for investors to place too much weight on what sdm says about its orderbank backlog.
I used to hold sdm and like you I was concerned about the exceptionals, debt, and cashflow. In 2015/6 a new factory was opened in Asia, and the UK sites and operations were streamlined. As a result I was expecting cashflow and margins to improve in 2017, even without revenue growth. However although SDM reduced debt in 2016, it rose again in H1 17 and the outlook was guarded so I sold at the interims.
I like sdm's strategy but I have lost confidence in the management. The Capital Markets presentation of 26th April was uninspiring in content and delivery.
My main reason for investing in sdm was the acquisition of United Wireless which I thought was potentially transformational for growth prospects. United was tiny but had a consistent growth CAGR of >25%. However sdm seems to have relocated the wireless business to Sweden and only a handful of staff remain on wireless in the UK. This reorganisation coincided with the loss of the large wireless customer which caused the previous sdm profit warning. At the time of the United acquisition the former owners were given significant sdm share holdings and roles, but they now appear to have been marginalised in favour of ex-Laird people who presumably have worked with Charlie Peppiatt in the past. So as far as I am concerned the integration of the United acquisition has not been handled well and that makes me question management and the future prospects for this division.
As you say if sdm can partially deliver on it's strategy then some sort of SP recovery should follow, but sdm seems accident prone and in my view further disappointments are likely. I don't think sdm will ever achieve consistent organic growth under this management team for the reasons outlined above and others.

Effortless Cool

purpleski,

I thoroughly endorse the sentiment of your post but would respectfully suggest that you might prefer to keep your own counsel, rather than "keep your own council", which sounds both expensive and dull (although with those investment returns, you can probably afford it).

Hi Murakami

I largely agree with you but Paul raised the B word and it will impact on our investing universe but will try to avoid responding even if Paul mentions it!!:-)

Didn’t not realise you worked for Stockopedia. Will stay clear of B...t but it will impact stocks, so as long as it does not result in personal abuse, see some of the comments directed at me above, then I think it is a fair subject for comment, for example if one is discussing airline stocks or companies that trade heavily with Europe for example or relie on the free movement of goods heavily as reported by Mark Brumby over at Langton this morning (though Aston Martin is not a PLC)

“ Aston Martin says that it may have to halt production if a deal is not struck with the EU. CFO Mark Wilson says no-deal would have the ‘semi-catastrophic effect of having to stop production’”.

Best wishes

Michael

Oops sorry :-)

Small Cap Value Report (Wed 8 Nov 2017) - TRCS, SDM, JPR, MKS, JDW, PSN, PVCS, ZZZ

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