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Small Cap Value Report (25 Oct 2016) – SHOE, CPR

Tuesday, October 25, 2016 9:05
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Good morning!

In case you missed it,here is my interview yesterday with Exec Chairman, Ric Traynor, of insolvency practitioner Begbies Traynor (LON:BEG)  (in which I hold a long position). I thoroughly enjoyed chatting to him, and reliving a few moments from my own experience of working in the sector, 25 years ago.

The next interview planned is with the CEO of Staffline (LON:STAF) (in which I also hold a long position) – so I invite you to submit any questions you’d like me to ask on your behalf using this link.

Shoe Zone (LON:SHOE)

Share price: 169p (up 18.6% today)
No. shares: 50.0m
Market cap: £84.5m

Trading update – this covers the 52 weeks to 1 Oct 2016.

The key paragraph is more positive than I was expecting, saying;

The Board expects pre-tax profit for the period to be broadly in line with expectations and marginally ahead of the prior year.

The business continues to have strong cash conversion and closed the year with an approximate net cash balance of £15.0m (2015: £14.2m).

Valuation – broker consensus EPS forecast is 17.5p, so assuming they achieve about 17.2p (based on “broadly in line” actually meaning slightly below), then after today’s big rise in share price, the PER is 9.8.

Given that nearly 18% of the market cap is the company’s own net cash balance, then the ex-cash PER is about 8.1 by my calculations.

Dividends – the yield is generous, with a payout of 10.5p forecast for this year, yielding 6.2%

Outlook – the company has not really said anything about the future in today’s update, and has therefore completely ignored the elephant in the room – the devaluation of sterling. Since ShoeZone imports product from China, cheap plastic shoes, then its future deliveries are bound to be more expensive.

Competitors will also have to put up prices, to protect margins, and we simply don’t know yet how consumers are going to respond. Clearly higher prices will reduce volumes sold, but we don’t yet know by how much.

I think it was a big omission for the company not to say anything about this issue at all in today’s update.

My opinion – this is the calm before the storm for retailers. Hence I reckon today’s pop in the share price may prove short-lived perhaps?

I’m avoiding apparently cheap retailers for now, because when business turns down next year, on more expensive product feeding through, and overheads rising, who knows what profits will be? Today’s surge in the share price looks to me more like a selling opportunity, than a buying opportunity.

Carpetright (LON:CPR)

Share price: 196p (unchanged today)
No. shares: 67.9m
Market cap: £133.1m

Trading update – I read this update before 8am this morning, and was left feeling confused – it didn’t seem to make sense to me – with LFL sales down, but then saying profit expectations were unchanged. Let’s have another crack at working it out!

Today’s update covers the 25 weeks ended 22 October 2016. The company has a 30 April year end, so this is the bulk of H1 for 2016/17.

Key points;

The Group’s full year profit expectations are unchanged(note 1)

I’ve been nagging for companies to provide a footnote to quantify what expectations are, and am delighted to see that this company has indeed provided such a footnote, as follows;

1.     Consensus for the year ending 29 April 2017 is for Group underlying profit before tax to be £18.5m, with a range from £15.2m to £20.5m.

Although to get top marks here, the company could have included the EPS equivalents too! Let’s assume that the 20.7p EPS forecast shown on Stockopedia is consistent with the company’s underlying PBT figures above. It looks about right to me.

Therefore the current year PER is about 9.5. That’s the cheapest I can remember for a long time. If you cast your minds back, Carpetright commanded a bonkers premium rating for many years – it was valued on a PER of about 40 for a long time, for no apparent reason.

Anyway, the price has finally come back down to earth – maybe due to more competitive pressure from other sector participants?

Braemar Shipping Services (LON:BMS)

Pendragon (LON:PDG)



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