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Small Cap Value Report (4 Jan 2017) – NXT, J.Lewis, BM, STAF, ACRL, SPSY, CAMB

Wednesday, January 4, 2017 7:49
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Good morning!

Thanks for all the positive feedback on yesterday’s article, I’m glad people found it interesting.

Graham’s having a day off today, so just one report. I intend covering the following;

Next, John Lewis amp; Bamp;M trading updates – yes, I know they’re large caps, but the idea is to get a feel for how retailer bellweathers have done over Xmas. This has read-across to smaller retailer shares – note how Mamp;S, Debenhams amp; French Connection are all down c.5% this morning, in sympathy with Next’s lacklustre Xmas trading.

Staffline (LON:STAF) – in line trading update

Accrol Group (LON:ACRL) – interims to 31 Oct 2016

Spectra Systems (LON:SPSY) – positive trading update

Cambria Automobiles (LON:CAMB) – AGM trading update, in line with expectations.

Large cap retailers


John Lewis Partnership

Obviously this business is not listed on the stock market, because it’s a partnership. However, it reports on Xmas trading each year via its website – here is this year’s report, which covers the 6 weeks to 2 Jan 2016. Key points;

Waitrose LFL sales (excl. fuel) down 1.4%

John Lewis stores LFL sales up 5.1% – clearly an excellent result (assuming margins are similar to last year)

“Click amp; collect” important amp; growing

Online is still growing very fast:

Online sales were up 21.4%, representing 40% of total sales

Logistics amp; IT are absolutely critical for retailers now, more than ever;

Our performance reflects to a large extent the significant investment we have made in our distribution and IT capability.
Despite the fact trade was even more concentrated across a number of very busy shopping days, our operations performed especially well.’

This has important read-across for all retailers, in my view. The ones that fail to invest in decent logistics amp; IT are probably more likely to fall by the wayside.

My opinion – a very impressive performance from the John Lewis stores (less so from Waitrose). So far today, the stock market has concentrated on the lacklustre update from Next (see below), but maybe that’s a mistake? John Lewis has had an excellent Xmas, so maybe Next’s problems are home-grown?

It’s not just because John Lewis has a broader range than Next either – it says today that all 3 main categories (fashion, home amp; technology) performed well.

Next (LON:NXT)

I’ll come back to this later, as am getting a bit bogged down.

Basically, it’s not as good as expected, so the shares are down, and have pulled down other retailers too.

Special divis make this a nice income stock, and it’s certainly coming back into buying range for me. Although I wonder whether Next may struggle to maintain its sector-leading net profit margin? It’s remarkable to find such a high quality business on a PER of below 10, but where’s the growth going to come from? It seems that Next is likely to only, at best, stand still in terms of future profitability, maybe? Hence the low rating.

The market is really only interested in online retailers at the moment, or growing, smaller retailers. Although I wonder if the pricing gap between growth amp; value retailers may now be getting too wide?


Very strong UK LFL sales growth of 7.2%, from this pound shop chain. Although 1.1% of that was an extra day’s sales, so LFL was really 6.1%, still outstandingly good.

So I’m starting to think that the top end (John Lewis) and the bottom end (discounters) have had a good Xmas, but the squeezed middle maybe hasn’t?

Staffline (LON:STAF)

Share price: 856p (up 1.3% today)
No. shares: 27.7m
Market cap: £237.1m

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

Trading update – I was worried that a profit warning might be on the way here, due to seemingly unrelenting selling pressure in the market, and a lowly valuation.

However, I need not have worried, as the company has continued its excellent multi-year track record;

The Board is pleased to report that the Group expects to deliver full year results in line with market expectations.

Profit is split roughly evenly between the 2 divisions, both of which seem to be trading well;

Demand in the Staffing business has remained strong through the second half and the division has once again achieved excellent growth in the number of OnSites this year.

PeoplePlus, the Employability, Skills and Justice Division, has also made good progress, becoming the top performer in Work Programme contracts as well as benefiting from its focus on improved margins.

I recently interviewed the CEO of Staffline, Andy Hogarth. He sounded a little downbeat, but that’s probably because he had a heavy cold.

There are some short term issues over the timing of Govt contract renewals, which is reflected in cautious broker forecasts.

My opinion - the company has an outstanding track record of identifying new business areas, and executing them well. For that reason I’m happy to look through any short term uncertainty.

The valuation looks very modest to me. I think worries about its E.European workforce disappearing are misplaced.

More to follow – I’ve got a cold, so had to lie down for a bit, but will carry on a bit later – article should be finished about 6pm today. Sorry for delay.



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