Small Cap Value Report (Weds 31 Jan 2018) - BOTB, JOUL, BST, SAT, RNWH | Paul Scott

30th Jan '18 by Paul Scott

56 comments 18958 reads

Good morning, it's Paul here!

To get you started today, here is the link to yesterday's completed report. I added new sections on Filtronic (LON:FTC) and NWF (LON:NWF) in the evening (EDIT: extra bits added re NWF, after talking to an adviser to the company, who helped me with understanding the business model)

On to today. I see that yet another outsourcing company has run into trouble. Capita (LON:CPI) this time. The RNS today says that it needs to raise c.£700m in a Rights Issue, has suspended divis, and is to make non-core disposals, and cost savings. It's become too big & complex. I don't know the company at all well, but it seems to me there are 5 clear lessons to be learned from Carillion, Capita, and previous failures in the outsourcing & support services area;

It's a lousy area for investors, unless the business is focused in a specialist niche area, and is very well managed.
Operating a group with a weak balance sheet, loaded up with debt from acquisitions, is very often an accident waiting to happen.
Contracting businesses often mess up contracts in one way or another. This is bound to happen, as offering to build something large, or provide a complicated service for multiple years, is fraught with risk. Yet contractors often under-estimate the risks & costs, in order to win the contract, sometimes at an uneconomically low price.
Investors are often sucked into shares in this sector due to a high dividend yield. Companies with weak balance sheets, lots of debt, and paying big divis are an accident waiting to happen. I only go for high yield shares if the balance sheet is bullet-proof.
The accounts in this sector cannot really be relied upon. Reported profits often turn out to be illusory, once problems with contracts later emerge.

Overall then, my resolve is stiffening to avoid this sector like the plague.

Best Of The Best (LON:BOTB)

Share price: 255p (unchanged today, at 11:31)
No. shares: 10.12m
Market cap: £25.8m

(at the time of writing, I hold a long position in this share)

Interim results - for the 6 months ended 31 Oct 2017

Best of the Best runs competitions…

Unlock with Email

Unlock with Google

Already have an account?
Login here

mojomogoz

31st Jan '18

https://www.stockopedia.com/content/scs-sofa-so-good-baby-302388/

https://www.stockopedia.com/content/armchair-ageddon-at-dfs-194239/

IMO (and that can be misguided!) I think the net cash position is fairly bullet proof at the moment. The SCS (LON:SCS) business is set up to be quite resilient to downturns. Yes it will challenge short term earnings but it should not cause a drastic erosion in cash position. They had trouble back in 2008 caused by too rapid expansion in 2005-7 and then a technical catch in the credit crisis when providers withdrew credit insurance (I say 'technical' as pre 2008 it is the kind of thing that people did not understand...their fault for getting caught with it but so would most smid cap cos).

The issue going forward is what will they do with so much cash? Four choices:
1) Acquisition
2) Buy back stock or special dividends
3) Lot more new stores/ other investment
4) Buy out Sun Capital who own 40% (private equity)

Perhaps it is clarification on the cash pile that leads to stock re-rating.

I think they hope for a chance at 1. Based on mgt approach and discipline I think they will do this very cautiously and not force it so its a case of whether the opp comes.

On 2 they just bought back 1.2% of stock the other day which was really aimed at a bit of 4 above (as bought off of Sun).

On 3 they have a target of 30 store locations that would suit a SCS (client base). They will only open if the circumstances are right which for them is mainly destination retail parks with other furniture and housing related stores. An other investment could be starting their own furniture production capability as this would allow them to move closer to DFS Furniture (LON:DFS) margin...but would introduce greater cyclicality and downside too.

So at the moment, if I am correct on the security of their cash position, then they can either fully buy out Sun Capital or fund the whole 30 stores they want to open (at £1m per store, their normal costing for opening). That's quite a buffer...and decent armageddon proofing (a little too much).

IMO they should get on with a very significant share buyback program. At least 20% of outstanding stock.

matylda

Most grateful for that, that Dividend is looking quite attractive!

Andrew L

Interesting points. Usually accountants have specific accountancy training. CFA covers accounting but is not a professional accountancy qualification. So there are pros and cons. On the one hand having a CFA as the CFO helps to give an understanding of the investment side. On the other hand it means a lack of a specific accountancy background. So it could be a positive or a negative.

On face value it does seem unusual to appoint a CFA as the finance person. Usually the post does go to a qualified accountant as far as I understand. However, the ambition of Dotdigital may make this a positive and probably the accounting for a small company like this isn't too complex. I.e. it isn't exactly a global bank. As stated a CFA will be able to judge shareholder value enhancements better than an accountant.

For disclosures sake I have a CFA qualification. It is an ok qualification but quite theoretical and all driven by multiple choice exams. Tough to pass or at least you have to give up a lot of weekends to study like mad.

Not sure why a few people gave a thumbs down to your post!!! Seemed like a fair comment to me. Or at least raised a point that should be considered. I don't think you were criticising the CFA qualification (fair enough if you were) you were just asking if it was suitable for an FD role.

Wimbledonsprinter

I agree that the CFO does not need to be a qualified accountant.

Interestingly, at Staffline (LON:STAF) , which for a small cap gets its numbers out really quickly, the CFO for the last two years, Chris Pullen (last week promoted to CEO) left school at 18 and joined the army - got an MBA (I think) but had no formal accountancy qualification. Pullen’s replacement as CFO, Mike Watts, is a chartered accountant (ex PWC).

Also on Staffline (LON:STAF), the outgoing CEO, Andy Hogarth, who at last week’s private investor presentation emphasised his confidence in the company going forward has sold two-thirds of his shares (late evening announcement yesterday).i

Ramridge

Re. Burford Capital (LON:BUR) Please note that Burford issued a late RNS yesterday. It has raised $180m in a US bond issue. Market reaction seems to be positive.

JohnEustace

Just to clarify Burford Capital (LON:BUR) raised the $180m in London - the first ever $US bond issue on the LSE's Order Book for Retail Bonds (ORB).

mercury61

Paul
I've been following Wincanton (LON:WIN) and see it going up and up. Your valued thoughts if possible. Thanks

Paul Scott

Hi Ramridge,

I don't usually bother looking at RNSs from Westminster (LON:WSG) . The company has been such an abject failure for so many years, that I'm amazed it still exists. Fundraising after fundraising. Who are the masochists who pour money into rubbish like this? Fastjet (LON:FJET) is another one in a similar vein. I think we can be pretty certain that the investors are using other peoples' money!

Regards, Paul.

Agree on that. Not point looking at the dogs. Every dog may have its day but good quality companies deliver the strong long-term returns. Waiting for a dog to turnaround is usually a fools errand. Fastjet was such a dumb idea I was amazed that it got going. Low cost carriers worked in Europe because the EU got rid of national protection for flag carriers. African countries are not likely to do the same and it is a tough continent to operate in.

Hi mercury61,

I've been following Wincanton (LON:WIN) and see it going up and up. Your valued thoughts if possible.

You must have been looking at the chart upside down, as it's been trending down over the last year!

I can't see any results or trading updates from WIN today, so there's nothing for me to comment on. I don't generally comment here on day-to-day share price movements. This column is all about giving analysis & views on the day's trading updates & results.

Here's the archive for mine & Graham's previous comments on WIN (which you can access for any company by going to its StockReport, then clicking on the "Discuss" tab).

Oh quiet possibly! Thanks for your reply and understood.

Looking at the reader requests, I'll try to cover most of them.

So far, I have a list of 8 companies to try to cover today, so will do as many as I can, which are:

Best Of The Best (LON:BOTB) (which I hold)
Joules (LON:JOUL) - interims
Big Sofa Technologies (LON:BST) - trading update
Satellite Solutions Worldwide (LON:SAT) - trading update
Renew Holdings (LON:RNWH) - AGM statement
SCS (LON:SCS) - trading update
Real Good Food (LON:RGD) - profit warning (another one?!!!)
Low & Bonar (LON:LWB) - final results

JamesS

Hi Paul,
I was wondering if you had any thoughts on Capita (LON:CPI) and the outsourcing sector as a whole.

I know Capita is too big to warrant a full blown section but i like the paragraphs you do on bitcoin and other more macro items and also considering the substantial coverage carillion and capita are getting in the press recently would probably be of interest to some people.

However if you're already busy enough with the smallcaps no problem.

KR
James

Mark Simpson

Flybe (LON:FLYB) Q3 trading statement today:

https://www.investegate.co.uk/...

May actually be finally showing progress on the turnaround. Q3 has normally been loss-making for Flybe (LON:FLYB) but if I have got my maths correct Q3 may be profitable. This augers well for a full year result. If they can keep cost per seat similar in Q4 results could look something like this:

This is probably too optimistic for Q4 but shows that this may not be the basket case that is being priced by the market.

Francis Dwan

Thanks for SAT

Re Westminster (LON:WSG) Agreed. No position long or short, and no intention to ...

truegent

hi paul, please review Best Of The Best (LON:BOTB) if you can - a nice special div when we thought they had stopped ! (due to the buy-back announcement they made before)

shauniekent

Best Of The Best (LON:BOTB) The results today talk about their strategy of reducing ticket sales to bolster sales and increase their target market. This may be a key reason for growth being lower than hoped. Directors do seem upbeat about the impact this is having.

Talk of moving into other areas - eg motorbikes or simply just cash lotteries.

Growth not firing as we'd hoped, but lots of positives. Picture could look once again exciting in 6/12 months.

davidjhill

Nice analysis. I like this and useful. Own them higher myself but as a turnaround I think they may have legs.

Circa £120m of cash I believe so unlikely to go bust aka Monarch or Air Berlin and the departure from the market of those two appears to have been net positive for pricing across the market.

With a NTAV of £155m (accounting for debt) vs a market cap of £75m this is priced at 0.5 * assets. Only £11m of intangibles so nothing too goodwill related sitting on b/s.

If they can start making £25-30m p/a PBT consistently from next year you can see them 3 or 4* higher from here at £300m mkt cap. (£150m nav + 7* earnings)

or am I missing something (other than obvious health warning attached to airlines in general :)

portugull

Paul would be very interested in your thoughts on FLYBE Q3 Trading .

This has been my worst ever investment in 14 years trading.

Small Cap Value Report (Weds 31 Jan 2018) - BOTB, JOUL, BST, SAT, RNWH

Best Of The Best (LON:BOTB)

Unlock the rest of this article with a 14 day trial

About the Author

Paul Scott

56 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...