Small Cap Value Report (Weds 28 April 2021) - FCCN, MUL, ELTA, PEB, TRX, W7L

28th Apr '21 by Paul Scott

61 comments 10571 reads

Good morning! It's Paul & Jack here with the SCVR for Wednesday.

Timing - I need to be finished c. 1pm today. Update at 13:20 - I've got a bit more time available, so am carrying on. Update at 14:37 - today's report is now finished.

Agenda -

Paul:

Wickes (WIX) - is demerging from Travis Perkins, to become a standalone, listed company. WIX will have 252.1m shares in issue. I'll take a look at it once the price is live, but probably won't be a small cap. No section on this below, it's just a quick note here.

French Connection (LON:FCCN) - review of FY 01/2021 results - awful, as expected due to impact of 3 lockdowns. But balance sheet is still robust, and current trading sounds encouraging. Everything still to play for here. Bid talks continue. It's a special situation, so won't appeal to everyone.

Mulberry (LON:MUL) - a positive trading update, it moved back into profit in H2. But the shareholding structure is poor, being dominated by 2 major shareholders. Could be an interesting punt on the brand coming back into fashion? Good Far Eastern performance, and margins improved.

Electra Private Equity (LON:ELTA) - just to flag up an interesting special situation I've been researching. Not related to news today, so I've put it into a separate article here. In summary, this looks a cheap way into TGI Fridays and Hotter Shoes, which are the 2 remaining larger investments in this investment trust which is in the process of being wound up. Valuation of TGIs in particular looks anomalous, compared with much higher ratings of listed peers like Restaurant (LON:RTN) and Fulham Shore (LON:FUL) .

Pebble Beach Systems (LON:PEB) - a micro cap with too much debt & a weak balance sheet. However, it remained profitable in a difficult 2020, and has seen a strong increase in order intake in Q1 2021. Might be of interest to risk-tolerant investors?

Jack:

Tissue Regenix (LON:TRX) - Covid disruption but underlying operational progress from the Leeds University spin-off woundcare specialist. There is potential here, but also a track record of losses and equity dilution.

Warpaint London (LON:W7L) - branded cosmetics producer has made mistakes in the past, but could it be emerging from…

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Effortless Cool

28th Apr '21

It's about time she handed back her CBE, as well. In my opinion, it was a disgrace that she was awarded it in the first place, given what was known about her role in the Post Office scandal at that time. If she doesn't give it up voluntarily, she should be stripped of it.

Boon

Just thinking what a deep-value price French Connection (LON:FCCN) is at the moment, based on today's results.

On a per-store basis, with EV ~ £23.5m and 67 stores that is only £350k a store, hardly much more than cost of fixtures and fittings for a new store. And that's prescribing no value to Wholesale, Licensing or Online operations.

If you assume (very pessimistically) that Wholesale, Licensing, and Online is worth half the market cap, then the value prescribed per store based on the current share price is only £175k!

Anyone have a good, up-to-date benchmark in fashion retail of per-store valuations?

Not a good comparison as different sector, etc. But when I was doing Fulham Shore (LON:FUL) earlier this week you're paying in excess of £1m per existing branch on an EV value...!

Obviously this means nothing if the lease liabilities are onerous and they can't trade profitably from those stores.

On a per-store basis, leases look like they've decreased from £113k/yr at end FY20 to £76k/yr at end FY21. A £2.5m/yr rent saving on continuing store operations, and £1.6m on discontinued stores (and this excludes any cost savings from business rates from those discontinued stores). IMO, still don't think their Retail operation is break-even profitable run-rate yet, so still very puzzled why only targeting 2 more stores to close this year.

abtan

Tinybuild Inc (LON:TBLD)

I looked at this company shortly after IPO and it seemed overvalued to me, but then I'd say that for most of the listed games developers/publishers and I've been proved wrong - at least from a share price perspective - over the last year or 2.

Here are my notes from the IPO document for any interested - sorry, they're a bit crap, but you'll get the idea that a lack of detail was enough to stop me investigating further.

Note that the IPO was March 9th, 2021.

----

Crap Notes

In the IPO document (dated March 3rd 2021) they have only included results up to June 30th 2020, with zero indication of how the FY is looking. Why not include July-December, even unaudited figures? And if they're not ready yet, they should be.
First 6 months of FY20 looks impressive with very high gross margin. I wonder if no more releases were planned for 2020? In their pipeline section they only indicate releases for 2021-23. There are quite a few, but no mention of 2020...hmmmm. Don't appreciate the lack of transparency.

andywillz94

The Witcher series is a fantastic set of games and the Netflix series was hugely successful (renewed for 2nd Season). However, Cyberpunk was a overhyped letdown, particualrly for consolue players. I wasn't actually aware this is a publicly traded company, i'd really like to have a look in to this one,

May I ask what websites you used to research this company? i get no results from ADVFN (not sure why?) and I haven't upgraded further on Stocko to look at the company on here. I've also had a quick look and HL doesn't list them on the app as a purchase. I don't often stray outside of UK listed companies so i'm not familiar with the research resources i'd need to look at a comapny on the Warsaw Stock exchange.

Bonitabeach

French Connection (LON:FCCN)

They can't.

Leebod

You can look at the charts for free on stocko but i went to the investors site for their info at https://www.cdprojekt.com/en/i... I can't see an easy way to invest.

I did find one fund that lists it as it's no1 holding but it seemed to contain only polish stocks so ignored it.

I love the Witcher games but haven't played Cyberpunk yet - was waiting for my 3090 card to at least make it look shiny first!

Bluesky Ventura

French Connection (LON:FCCN) - Is this still a value trap after 8 years of positive coverage on Stockopedia's SCVR? (covered over 40 times since 2013, see link https://www.stockopedia.com/sh...).

After 8 years since first being positively reported on the 15th of May 2013 at the share price of 31p, valuations have gone nowhere. (Link to SCVR from May 2013: https://www.stockopedia.com/co....

My valuation estimate is still only 20p.

It a long time to wait for recovery without any dividends.

Investing in value traps is not the problem per se, as you can always sell out, but the opportunity cost of leaving your money in a none productive investment for a long period of time limits returns.

Anyway, I don't hold French Connection (LON:FCCN) but thought it worth mentioning it's been 8 years since first expecting a recovery on the SCVR, and hope the holds don't have to wait another 8 years.

BSV

BarrieLomas

1spatial (LON:SPA) Directors Buy, on Full Year results day, both CEO and CFO , a nice touch, Not often seen

back2value

This:

Stephen Marks was criticised a few years ago for hoarding cash at FCCN, but due to unforeseen circumstances, it's proven to be the right decision. I wish more companies would be prudent with their balance sheets, because nobody knows what disasters might be around the corner.

...is absolutely spot on, and the reason, after a prolonged battering and still being well in the red, I still opt to hold on to my FCCN shares.

Great and succinct analysis as we have come to expect day in, day out. Thanks!

B2V

Stephen Marks was criticised a few years ago for hoarding cash at FCCN, but due to unforeseen circumstances, it's proven to be the right decision.

In 2006 Marks was sitting on shareholders' cash of £61M. He must be incredibly long-sighted because he has needed every last penny of it, and then some. Marks has treated French Connection as his personal piggy bank.

"Unforseen circumstances" have nothing to do with it; unadulterated management incompetence, pure and simple.

fwyburd

I think this is a disingenuous post with a not very subtle, passive aggressive aim at Paul. You are no stranger to these sorts of posts but your argument is flawed. On March 2017 Graham wrote:

I don't know if the company will end up going to the wall, but I could see it eventually being bought out when it is financially distressed and there are no other options.

Whatever happens, I wouldn't trust that external shareholders will be treated well (based on what I understand from the Chairman's past dealings with them). So I won't be buying shares in this company again.

I don't regard this as positive coverage.

Cheers

Francis

FREng

The legal profession deserves some of the blame. There is an absurd legal presumption that electronic evidence is correct. This was suspended for a few years but reinstated after the Law Commission review said that too many defendants were seeking disclosure just to cause delay and cost. Judges don’t often understand technology well and refused disclosure applications many times in the PO cases. Yet any system should have a log of known errors and fixes that could be disclosed at little cost. I hope the LC revisit this legal presumption urgently.

Very good point. If French Connection (LON:FCCN) had distributed that £61m cash and put the company into administration, better outcome than shareholders are now with a £20m-ish market cap.

Hi Francis,

Thank you for your disingenuous post.

If you failed to understand my original argument, let's try to explain it again.

£FCCN continues to look like a value trap.
It's been suggested the share price might recover on the SCVR for about 8 years
The problem with a value traps is the opportunity cost of your funds invested and the effect on your returns

The argument I'm making is point 3. I hope you have a better understanding of the argument I'm trying to make.

Gromley

In 2006 Marks was sitting on shareholders' cash of £61M. He must be incredibly long-sighted because he has needed every last penny of it, and then some.

Very good point Bonitabeach. Whilst I often argue that net cash cash is not the same thing as cash available for the benefit of shareholders, that does not seem an unreasonable leap in this case. (Just to be picky I think net cash was 'only' £57m)

At that time French Connection (LON:FCCN) also had net current assets of £78m a figure that actually grew for the next three years (even though the cash element declined).

Back then they also had non-current assets of £49m (£36m of which "tangible") and virtually no non-current liabilities.

The current market cap is £21m, so if £21m had been distributed as a special dividend back in 2006 then even if the company had gone bust, shareholders would be better of now than they are.

In fact as far as a can see, it is not clear that £21m hypothetical payout would have sunk the company. As far as I can see, they still have net cash of around £5m (excluding the IFRS16 fantasy debt.)

I haven't really looked at FCCN in any detail as there has been little to tempt me; looked through this lens however I wouldn't really be happy had I been a shareholder back in 2006.

GloucesterBob

Interview with CEO and CFO after todays results.

They are very positive, but would they be anything else? Equity raise is not on the cards

The shareholding structure is the killer like Paul says, for Mulberry (LON:MUL)

The two big shareholders own >75%, so delisting would be easy to do. Neither shareholder sounds like the type that will care about small shareholders in a private company.

Andy Sav

29th Apr '21

Heiq (LON:HEIQ) that's a shame Paul. It's featured on Mello a couple of times. In the last showing Leon Boros led their interview. Sounds like he's invested and I think he knows a thing or two. It all sounded rather good but it's easy to pull the wood over the eyes of the lesser informed :)

dcon85

Hi Andy, despite being an early champion, it appears Leon Boros no longer holds this share according to a Twitter post yesterday.

https://mobile.twitter.com/Bor...

30th Apr '21

wow, interesting! Thanks for pointing that out

Small Cap Value Report (Weds 28 April 2021) - FCCN, MUL, ELTA, PEB, TRX, W7L

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Paul Scott

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