Small Cap Value Report (Weds 27 Jan 2021) - QUIZ, HEIQ, SBIZ, FLO, SCPA, SCS, WYN, KETL

27th Jan '21 by Paul Scott

128 comments 15429 reads

Good morning, it's Paul & Jack here with the SCVR for Wednesday.

Timing - today's report is now finished.

Agenda - let's start with some sections I prepared earlier (last night):

Quiz (LON:QUIZ) - review of its Interim results

Heiq (LON:HEIQ) - 2020 trading update

Simplybiz (LON:SBIZ) - 2020 trading update

Flowtech Fluidpower (LON:FLO) - 2020 trading update

Today's news:

Scapa (LON:SCPA) - recommended cash takeover bid at 210p

Scs (LON:SCS) - trading update at end H1

Strix (LON:KETL) - 2020 trading update - you may not like my view on this one!

Jack's contribution:

Wynnstay (LON:WYN) - Final results FY 10/2020

Quiz (LON:QUIZ)

(I hold)

Mkt cap £9m at 7.2p

Interim results - NB this is a special situation, which did a pre-pack administration in June, to ditch all loss-making shops, and put the remainder on turnover rents. Hence the figures will look awful for now, because the shops were shut for a lot of the time. What matters is whether the business can survive, and rebuild once shops can open normally again, plus the progress of its online offering.

In a special situation, it's all about survival, so cash is king. This looks OK - £5.5m at 30 Sept 2020. Latest cash is £3.0m net cash as at 25 Jan 2021, with additional £3.5m undrawn banking facilities. Hence the liquidity position remains OK, and is better than I anticipated. Bulletin board experts who confidently predicted (with no evidence of course) that Quiz would run out of cash, have been wrong so far.

Concessions - I was worried that QUIZ might have bad debt exposure to Debenhams and Arcadia. It says that of its 142 concessions, 85 are in Debenhams, and 29 in Arcadia, all are expected to close. That would only leave 28 concessions remaining, so this side of the business is more-or-less over. Sad for the people involved of course, but new jobs are being created elsewhere by online & logistics companies. We can't stand in the way of progress, and there's really no longer much demand for many existing physical retailers, especially department stores, a concept that's arguably had its day. Pleasingly, re Debenhams & Arcadia, Quiz says -

There is no financial exposure to outstanding…

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Logical David

27th Jan '21

Hi herbie47,

My understanding is VAT is payable on all items imported into the UK unless exempt.

Under £135, the VAT will be collected at the point of sale. Over £135 the VAT (plus any duty payable, plus a customs handling fee) will be applied by UK customs and charged to you separately by the customs agent.

If you watch the programme 'Watchdog on The One Show' on BBC at 7pm tonight it perfectly explains the rules regarding VAT on goods from Europe. It confirms what you have stated is totally correct about who collects the VAT.

Scott Porter

I haven’t heard back from any of them, but I generally sell low cost goods, max £20 I would say so either they are below the customers threshold or the buyers are just soaking up any costs (and probably swearing as they do so). It’s only hobby trading so I’m not shifting massive volume, I would say on average 1 - 2 items a day to EU.

Paul Scott

Hi dahoko,

Ah mystery solved, thanks for double-checking your figures, I thought something looked awry, as your posts are usually very sensible!!

I've spent a bit more time on QUIZ's figures, and worked out where the balance sheet strength has come from - the previously heavy lease liabilities have now largely disappeared, because of the pre-pack administration getting rid of the previous lease commitments. That's repaired the balance sheet very nicely.

I'd like to see QUIZ (I hold) reduce inventories, which are too high. Plus of course they'll have surplus inventories coming back from the closed concessions. Hence lots of gear to shift, I imagine plenty of that probably would need discounting to not much above cost price. Hence we might see a further hit to gross margins, but turning stock into cash should mean cash burn could be little to nothing in my view.

Remember they're not paying business rates, and probably little to nothing in rents on the new leases.

Hence everything still to play for, I don't see any financial distress in QUIZ's figures, which is a pleasant upside surprise. Roll things forward say a year, and it should be trading profitably again, and I've pencilled in a share price 3-5 times the present level, if things play out decently longer term. Probably not much risk of it going bust either, hence I reckon risk:reward is a lot better than the current share price implies, but only time will tell.

Regards, Paul.

Hi Housemartin2,

it was clear for some time that the agreement we would get would be pretty flimsy and entail a lot of admin and just these sort of problems.

Was it? I thought the consensus view seemed to be that the negotiations between EU & UK would go to the wire, and then both sides would compromise and avoid no deal.

I don't think people foresaw problems for eCommerce companies in this way.

For a business of BOO's size this is a fairly trivial issue. They can outsource distribution in the EU quite easily. Or rent a warehouse in Holland or somewhere, & do it themselves. Probably just weeks or a few months to set up something like that.

On the recent conference call re Debenhams, an analyst asked them how they intended dealing with returns from DEB customers, and BOO management indicated they're going to outsource the logistics. So it stands to reason that they'd do something similar with EU distribution for the main brands.

Some temporary disruption, might have a small profit impact, but it's not something that fundamentally changes anything, nor how to value the shares. Businesses of all sizes encounter operational glitches all the time. They can also dial marketing spend up or down at will, and that's a huge variable cost. I've been tremendously impressed with how online businesses did just that in 2020 over covid. Look at Sosandar (LON:SOS) (I hold) for example. It was burning through cash like nobody's business, but then they slashed spending once covid hit, and brought cash burn down to almost zero, despite sales growth slowing a lot. These online companies are tremendously flexible, it's a massive advantage.

Gromley

Strix (LON:KETL) was loaded with debt by the PE house just prior to listing on the stock market and is lower now than it was then.

I've never got around to looking at Strix despite it being quite popular around here.

However that comment has put me right off. It is so formulaic and you could replace "Strix" with a long list of company names - most of which no longer exist or at least are no longer owned by their shareholders.

Moving on ....

Phuntt

I don’t think there is a better example of Europe’s “punishment” strategy than this, Timarr and it frankly stinks. They are literally costing their own citizens and business on every transaction , massively reducing the liquidity of their markets, their businesses access to capital and outside of the share trading (which is regulated to EU firms) the business is migrating to the US and Asia anyway. It will always move to the most liquid and cheapest cost of capital. London, with a looser regulatory touch has long been the gateway for most of the world to invest in the EU - now that is much harder or at least more expensive.

The UK is losing now and possibly in the future, of course. But while money flows around the globe (and can’t be stopped), capital and wealth tends to accumulate and right now London is a major financial centre. My guess this is one area that in 2 or 3 years, it will be clear the EU made a major mistake not simply reciprocating the UKs offer of clearing.

abtan

Scs (LON:SCS) (no position)

FYI the company's true cash position was likely closer to £12m-£13m back in July (see my previous comment here).

They will definitely have unrestricted cash on the balance sheet right now and I imagine that they will be keen to keep it there.

Note the TTM revenues of £290m (Feb 2020 - Jan 2021) vs £334m at the same time last year (Feb 2019 - Jan 2020); quite a fall. I was surprised by this and was under the impression that they would be flying right now.

rmillaree

I haven’t heard back from any of them, but I generally sell low cost goods, max £20 I would say so either they are below the customers threshold or the buyers are just soaking up any costs.

It just so happens the vat free limit is generally 22 euros for imports - so you are probably pretty much on the bubble in that regard.

Note the current rule ends 1/7/2021 - so from that point on import vat will aply - however a system similar to the vat moss system called the import one stop shop - you will have to pay vat on a country by country basis and submit returns as approrpiate. Bit of apain but ultimately manageable .

https://www.avalara.com/vatliv...

something like that anyway

mojomogoz

neat summary for today

https://twitter.com/cnbcclosin...

timarr

I don’t think there is a better example of Europe’s “punishment” strategy than this, Timarr and it frankly stinks.

Hi Phuntt

I think it's a better example of "punishment" rather than the import / export chaos which is more a combination of an inevitable increase in border friction and the worst ever communications strategy ever (our government essentially pretending it's not happening). The EU were very particular about not forcing a date on the UK so that the lack of preparation couldn't be blamed on them.

In terms of financial services though, it looks bloody stupid. The EU could give temporary approval to EU firms to use UK clearing services while a deal is sorted out but have chosen not to, thus increasing the cost of capital all round.

Theories? Well, it certainly puts pressure on the UK to do a deal on financial services and reduces the UK appetite for doing competitive deals with other countries which would interfere with that. Otherwise it doesn't make much sense, as you've pointed out.

Of course, it could just the normal sclerotic decision making in the ECB which will get reversed as soon as the politicians stop squabbling over vaccine availability and notice that the cost of capital has increased dramatically ....

timarr

Snooker78

Appreciate the contrarian view and great spot in accounts, once lockdown eases people will lose interest in homes/furnishings.

tennis321

Thanks Paul and Jack - an excellent report

Albertos

May I suggest that AstraZeneca supply vaccine to the EU from British plants but that before the doses are given each recipient pays over 20% VAT to the British government - cards accepted but not euro's.

Oh and each vial is subject to separate export documentation. to be completed in triplicate.

LoL

That's very naughty EJC. ;-)

The EU team today made it crystal clear that they do not have the first clue about contract law, so I would be inclined to let them get on with whatever legal path they want to follow,

Although AZN have said they are offering the vaccine on a not for profit basis, I suspect that any future deals they sign with the EU might include a substantial false claim indemnity.

28th Jan '21

I stand admonished!

You can speculate on what happened though.

"Brussels we need a billion CV19 vaccinations."

First month spent going through 20 million pages of EU Directives for guidance - finding none. Two months doing an EU compliant tendering process to ensure plumbers had the chance to tender as well.

I voted to stay in the EU - makes you wonder.

Big Dog

bosch twk7203

Housemartin2

Paul Thanks very much for taking the time to respond.

I am not sure that the process of setting up a full scale fulfilment operation to serve EU countries is quite as straight forward as you imply, though I appreciate that you will know much more than me about this sort of thing.

Rgds

HM2

Chipspa

Paul, I believe that the Strix (LON:KETL) net debt for FY20 is forecast to be slightly better than expected at £45.5m (1.2x EBITDA).

I take on board your comments about the not "robust" balance sheet, but I think there are mitigating factors and this is short term and the free cashflow is better than it looks at first glance.

This is because for 2019/20 they have incurred c.£16m developing a new factory in China, which is forecast to be up and running (and within budget) later this year.

Coupled with this, they also purchased Laica in 2020 (for c.£20m or £30 with earn outs) the majority of which was financed with £10m cash plus shares.

This is all reflected in the FY20 £45m debt position I believe, but will enhance earnings and cashflow going forward (and also accounts for a lot of the Capex).

Prior to the acquisition of Laica and the construction of the new factory the debt was reducing and free cashflow seemed good.

In terms of kettles being disposable, I agree, but thats what helps Strix (LON:KETL) make money. Kettles are changed on average every 3 years and they have a 54% global share of kettle controls - they seem to have lots of IP / patents which they vigorously defend. This also seems to be a growing market, with China and the US "under-kettled" compared to Europe.

They are forecasting doubling revenues over the next 5 years - most of this being done organically. If they can manage anywhere near this level of growth, then their high ROCE and margins should IMO lead to a much higher share price.

I am long, so obviously biased, so DYOR, and would appreciate any comments / contradictions.

William Jenks

11th Mar '21

Very interesting what has happened since this article was written.

I can only presume the share price has increased so dramatically

Due to acquisitions.

Small Cap Value Report (Weds 27 Jan 2021) - QUIZ, HEIQ, SBIZ, FLO, SCPA, SCS, WYN, KETL

Quiz (LON:QUIZ)

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Paul Scott

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