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Small Cap Value Report (Mon 24 May 2021) - TED, CALL, ELTA, GLE, GHS

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Good morning, it’s Paul and Roland here with the SCVR for Monday.

Timing – today’s report is now finished.

Agenda -

Paul’s Section:

Ted Baker (LON:TED) – delayed audit but confirms results will be in line with expectations. I review the situation, and conclude that risk:reward seems unfavourable, with too much (yet to happen) upside turnaround already priced-in. Also there has been large dilution, limiting the upside on the share price.

Cloudcall (LON:CALL) (I hold) – a reassuring “in line” update today, from this serial under-performing, heavy cash burning IT/telecoms company. Its main sector, recruitment companies, is in a strong V-shaped recovery. I haven’t completely lost faith in CALL, so am happy enough to continue holding a small position after today’s update.

Electra Private Equity (LON:ELTA) (I hold) – I re-crunched the numbers over the weekend, so a quick update on this very interesting de-merger situation. It looks an attractively cheap way into 2 upcoming IPOs for TGI Fridays, and Hotter Shoes, both of which I think are likely to be successful standalone shares.

Roland’s Section:

Mj Gleeson (LON:GLE) – this housebuilder and land specialist is trading ahead of expectations. Gleeson has attracted some savvy institutional shareholders, but is there still value for buyers?

Gresham House Strategic (LON:GHS) – this small cap investment company has put its asset manager on notice and announced plans for a strategic review.

Mello – tonight

The regular online investor evening starts tonight at 18:00

More information here:…

Ted Baker (LON:TED)

180p - mkt cap £332m

Change to Full Year Results Date

Ted Baker Plc, the global lifestyle brand, announces that its preliminary results for the 53 weeks ended 30 January, will now be published on 10 June 2021 (previously 27 May 2021).

The reason given is disruption caused by covid on the audit process.

Really? Practically everyone else seems to be managing alright.

Which does make me wonder if there might be an issue over the going concern assurances need by the auditors? Although checking back to my notes here on 11 Feb 2021, TED had plenty of liquidity, and undrawn bank facilities at that time. Its last balance sheet looks solid. Hence going concern probably wouldn’t be an issue now.

Most importantly, it confirms today that trading is in line -

The Group confirms that full year results will be in line with consensus expectations.

Hence shareholders probably don’t need to worry about today’s delay.

The Group reiterates its FY January 2023 financial targets set with the FY2020 preliminary results and then upgraded at the interim results in December 2020.

Both Ted Baker (LON:TED) and Superdry (LON:SDRY) went into the pandemic with problems, and trading poorly. Both are trying to execute turnarounds, with lots of positive talk, but little to date in terms of hard facts that turnarounds are actually happening. Hence I remain sceptical, but open minded.

Looking back at the interim results (28 weeks to 8 August 2020) they were grim – an underlying loss of £(39.0)m, and a statutory loss of £(86.4)m – for the H1 period that included lockdown 1.

A big cost-cutting drive removed £31.0m annualised from the payroll. Rent reductions are also being achieved. So it could emerge leaner amp; more efficient. The key areas I’m looking for are to greatly increase online sales, and manage down the store estate rent liabilities.

My opinion - there’s been a big recent spike in lots of retailers share prices, on hopes of successful re-opening. In many cases, I think these surges have run well ahead of reality, and risk:reward therefore looks poor to me.

Personally, I’m not interested in speculating on turnarounds which may or may not be delivered. I’d rather stick to the facts amp; figures, and hold shares in companies which are actually delivering strong profit growth, performing ahead of market expectations, and getting big broker upgrades. Good examples (which I hold) are Joules (LON:JOUL) and Sanderson Design (LON:SDG) – where big rises in share price are solidly underpinned by the facts, not just guesswork.

There’s no doubt TED is still a really good brand, and the balance sheet looks strong. So the risk of dilution or insolvency does look low. That buys time for management to turn it around, and they seem to have a credible plan.

Hence on balance, this share could be good long-term. Although £332m market cap looks way too high for a business which is heavily loss-making, and where the turnaround is still only work-in-progress.

Liberum is forecasting another hefty loss of £(23.3)m this year FY 01/2022, but then a bounce back to a profit of £28.7m next year. That’s 12.0p per share. If that does happen, then we could maybe value it at a PER of 15-20 times. Which equates to 180p-240p per share price target. Since the current share price is already 180p, how does that represent good risk:reward? The upside is already priced-in. Hence people buying this share now are effectively betting that the company will not only move from losses into profit, but also beat what look like quite aggressive forecast profitability. Plus you have to wait 2 years for that to happen.

Overall risk:reward looks unfavourable to me, but good luck to holders.

The 3-year share price below shows what a disaster this share has been, before covid.

Big dilution – a very important point is that the share count was 55m from 2015-2020, but has since risen greatly to 185m shares in issue. Hence there’s no chance of the share price ever getting back to previous highs, because there are so many more shares in issue now. Hence the share price of 180p today, is an equivalent valuation to 605p before dilution (calculated as £1.80 * 185m, divided by 55m).



As always, the above is just my personal opinion, based on the information currently available. You may have a different view of things, so do please share any views in the comments section, I’m always interested in hearing different views on shares. I’ve got no idea what any share price is likely to do, that’s based on market sentiment, I just try to assess the fundamentals as best I can, and will get some right, and some wrong.


Cloudcall (LON:CALL)

(I hold)

74p (up 7%, at 11:00) – mkt cap £35m

AGM Trading Update amp; Investor Meeting

CloudCall (AIM: CALL), the integrated communications company that provides unified communications and contact centre software that integrates with Customer Relationship Management (“CRM”) platforms, provides a trading update covering the FY21 year-to-date…

The most important bit -

… the Group confirms that trading for the year so far is in line with the Board’s expectations.

Other points -

  • Deep V-shaped recovery continued into 2021
  • Sales activity continuing to strengthen in all territories
  • Core market of recruitment firms enjoying a particularly powerful recovery (we can verify this from positive updates from various recruitment companies we’ve looked at here recently)
  • Ner business amp; upsells running above pre-pandemic levels
  • Monthly recurring revenues at record levels, but I would expect that, so not a big deal
  • Net renewal rates back above 100% – I’m not keen on this way of reporting the numbers
  • Home working is a positive thing for CALL
  • New verticals – pleased with real estate – partnership with Propertybase – commercial launch in a few months’ time

Guidance/targets -

Operating costs are tracking in-line with our previous expectations for 2021 at ~11% OPEX growth – adding back the £1.3 million of one-time COVID-19 related savings in 2020. We continue to focus on our core financial objective to drive revenue growth of ~18% to ~£14+ million in 2021.

Furthermore, in 2022 we believe we can achieve revenue growth of ~25% to ~£17.5million, whilst limiting operating costs growth to ~12% and are still targeting EBITDA break-even during 2023. Our ambition remains to achieve a £50 million revenue run-rate during 2026.”

Presentation – on InvestorMeetCompany at 13:00 today, and then usually a recording follows later.

My opinion – neutral. I’ve learned the hard way that it doesn’t pay to be enthusiastic about this company, because it always misses forecasts, and always over-spends, leading to repeated fundraises.

That said, the recurring revenue growth is real, it’s just that overheads are high.

Tech businesses are often priced on completely wacky valuations at the moment, especially in the USA, which is now an important market for CALL, so who knows, it might attract attention at some point.

During a 3-year period when many tech shares have gone into the stratosphere, there’s no getting away from the fact that this chart below demonstrates a poor performance.

That said, if the growth accelerates to a level where investors find it exciting, then there’s a lot of potential upside from £35m market cap.

Overall I think today’s update has done enough to motivate me to continue holding the (relatively small) position that remains in my SIPP.


Electra Private Equity (LON:ELTA)

(I hold)

528p – mkt cap £203m

I did some more work on this over the weekend, and have tweaked my valuation figures, so thought I’d share it with you.

Here’s my post from 28 April, explaining the opportunity. Electra is winding itself up, to return funds to shareholders. Last week it announced (very positively I think) that the last 2 investments would be floated on the UK stock market, with Electra shareholders receiving shares in specie in the 2 new companies;

TGI Fridays – casual dining chain, franchise operation in the UK, highly successful and restructured during the pandemic. Expansion plans underway, and launching a 2nd complementary brand shortly. I think this could be a very successful float, due for Q3 on the UK main market.

Hotter Shoes – closed most of its shops in a CVA during the pandemic, now achieving strong growth online. A decent, profitable business.

Here are my latest valuation calculations. I started with using Restaurant (LON:RTN) as a benchmark, as follows;

Restaurant (LON:RTN) – I’ve done some work on Restaurant Group, and the latest figures seem to be (post recent fundraise at 100p): 765m shares * 122p = £933m mkt cap
Per recent Edison note, net debt now £250m post raise = EV £1,183m
Edison say pre-covid EBITDA was £118m,
Hence EV/EBITDA is 10.

TGI Fridays- using the same multiple of 10* EBITDA, we have £30-40m expected EBITDA (see ELTA announcement last week) = £300-400m, less £62m net debt = £238m-£338m valuation.

Hotter Shoes – I’m guessing this could be valued by the stock market under its own AIM listing at £50-100m

ELTA holding company has cash of £25m, although some may be used for other purposes.

Put that lot together (and ignoring a few other scrappy investments), I get sum of the parts of £313m – 463m

Using the enlarged share capital of 39.0m shares (see RNS today), I get to 803p – 1187p per ELTA share. This is a bit lower than my first stab at valuation where I reckoned 953-1371p. That was probably a bit optimistic, and I didn’t properly factor in the debt at TGI, which is greater than I expected, hence my reduced estimates now (these things are subjective, so will chance as the facts change). Be sure to do your own research, and let me know if you diagree with any of my calculations.

Hence the current price of 528p still looks cheap.

I think it’s fair to say my 803p lower estimate should be fairly well underpinned, but it’s ultimately the free market which will decide the price, when TGI amp; Hotter are floated separately later this year. My upside cash of 1187p is a bit punchy, but not wildly so.

My opinion – I really like TGI amp; Hotter, and reckon they could be successful IPOs later this year. ELTA shares look an attractive way in, at a bargain price, hence a thumbs up from me.

Roland’s Section Mj Gleeson (LON:GLE)

848p (pre-market open) – market cap £495m

Trading update

Housebuilder Mj Gleeson (LON:GLE) has put out a short trading update this morning, reporting trading ahead of expectations for the current year:

MJ Gleeson plc, the low-cost housebuilder and strategic land specialist, announces that the result for the current year (ending 30 June 2021) is expected to be ahead of market expectations.

This business has two distinct divisions, Gleeson Homes and Gleeson Strategic Land. Both appear to be trading well. Indeed, last year’s crash has been little more than a blip for shareholders who sat tight:

Gleeson Homes: This business specialises in affordable homes in the North of England and East Midlands.

Management say “strong demand for new homes has led to higher selling prices”. These have “more than offset” recent increases in material costs.

Gleeson Strategic Land: This business operates in the South of England. It buys up land, secures planning permission, and then resells the land to developers, usually larger housebuilders.

The company says that “demand for high-quality consented land from large and medium-sized housebuilders has returned to pre-Covid levels”.

Updated profit estimates for FY20

Unfortunately, today’s trading update doesn’t include any financial guidance. Nor has Gleeson provided any information about the market expectations it’s referring to.

However, we can glean some information from the group’s H1 results (Gleeson has a June year end) and Stockopedia’s consensus forecasts.

Guidance at the time of the H1 results was for 1,775 homes to be completed during the current year. 951 were completed during H1 (around 53%). However, today’s commentary suggests to me that margins may be slightly ahead of H1.

On that basis, I’d suggest we can double Gleeson Homes’ H1 operating profit to get a full-year figure of £41m.

Guessing at the outturn for the land business is a little more difficult, but we know that four land sales completed in H1, generating an operating profit of £2.6m. A further four sales were underway at the half-year mark, so it seems fair to double this figure too.

Group costs during H1 were £2.3m, so I’ll double this for the full year. That gives me an estimated operating profit of around £42m for the full year. I’d estimate this could give an after-tax profit of just over £33m — around 10% ahead of the consensus forecasts shown in Stockopedia:


It’s interesting to see that Gleeson’s shareholder register is a little different to most housebuilders. In my view, the four largest institutions on the list generally have a reputation for stock picking and long-term investing. In general, I’d be quite happy investing alongside names such as these:

However, I think we can assume that all four of these institutions bought shares in Gleeson at prices well below current levels. Does the stock still offer value?

At first glance, the shares don’t seem cheap. The Stocko valuation graphics are mostly yellow and orange, suggesting fair value at best:

I’m not keen on buying housebuilders at a big premium to their net asset value, although I accept that the exceptional profitability we’ve seen in this sector in recent years has justified such premia.

Gleeson’s operating margin and return on capital were certainly strong until last year:

My view

Personally, I’m not buying housebuilders at the moment.

We’ve had a decade of government subsidy, with super-cheap mortgage finance that’s supported a major bull market in housing. I don’t know at what point the wind will change, but to me, this doesn’t seem like a good time to look for value.

However, I do have a favourable impression of Gleeson’s business. If I already held the shares, I’d continue to do so after today’s news.

Gresham House Strategic (LON:GHS)

1521p (-1.6% at 0852) – market cap £53m

Board changes and announcement of strategic review

Requisition for Extraordinary General Meeting

Paul reported yesterday on the potential opportunity at Electra Private Equity (LON:ELTA), a fund which is being wound up.

Today, small cap investment company Gresham House Strategic (LON:GHS) has put its asset manager on notice and announced plans for a strategic review.

Gresham House Strategic is an investment company that invests mostly in smaller listed companies. Its portfolio contains many names that will be familiar to SCVR readers. Here’s a snapshot of the fund’s top 10 positions at the end of March 2021:

Source: Gresham House Strategic Q1 2021 factsheet

GHS adopted a small-cap mandate in August 2015. Performance since then has been good, in my view. The shares have almost doubled over the last five years, and there have been a few small dividends:

However, GHS shares have traded at a discount to net asset value for much of this period:

Source: Gresham House Strategic Q1 2021 factsheet (discount is shown by pale blue vertical bars)

According to the trust’s management, this discount has made it impossible to raise fresh equity to pursue new investments. Growth potential is thus said to be “limited”. This situation has led to today’s announcements.

Board change and strategic review

The strategic review has been announced alongside the retirement of the fund’s long standing chairman, David Potter.

The Board of GHS announces that David Potter, Chairman, has advised the Board that he will be retiring from the Board and will not be standing for re-election at the forthcoming Annual General Meeting in September 2021. A process to identify a successor has already commenced.

According to the company, Mr Potter was instrumental in the development and execution of the current strategy:

David was the principal driving force to establish GHS after the winding up of Spark Ventures VC portfolio in 2015. During David’s period as Chairman, GHS has delivered strong investment returns and has been one of the best performing small company investment funds in the UK pursuing its strategic public equity strategy under the asset management of Gresham House Asset Management (“GHAM”).

However, the board is disappointed that despite strong share price and investment performance, “it has not been possible to raise additional equity due to the existence of the discount of the share price to net asset value”.

This is frustrating for GHS’s management:

The future growth of GHS is therefore limited due to the lack of availability of new funds for investment at a time when both several attractive investment opportunities exist and GHS would benefit from taking larger stakes in some of its existing investments.

As a result of this situation, the company has put its asset manager (Gresham House (LON:GHE)) on notice and announced plans for a strategic review. The options under consideration appear to include choosing an alternative asset manager and – potentially – winding up the fund.

The review is expected to be completed by the time of the AGM in September.

EGM request

The situation is further complicated by what appears to be the breakdown of the relationship between David Potter and Gresham House, which is both GHS’s asset manager and its largest shareholder.

Rock Nominees Limited has requisitioned an EGM on behalf of Gresham House.

The EGM request calls for Mr Potter to be removed from the board immediately, and for a representative of Gresham House to be appointed to the board. Following this, the directors of GHS should undertake a strategic review (my bold):

The directors of GHS by 12 July 2021 to undertake a review of the strategy of GHS with a view to determining the best means of maximising value for shareholders including consideration of a realisation of the invested assets of GHS.

My view

Is there an opportunity to buy GHS shares at a discount to NAV, in the hope that the strategic review will cause the discount to close?

In theory, I think the answer must be yes. But I’d be cautious about attempting this in practice.

GHS’s discount has already narrowed from a peak of 30% in 2018 to just under 10% at the end of March 2021. If the company chooses a new asset manager, there’s no guarantee that the shares will immediately re-rate any further.

Similarly, in a liquidation scenario, I’m not sure this discount is big enough to translate into a meaningful profit, once costs have been deducted.

If Gresham House Strategic shares fall lower over the coming weeks, then I might revisit this situation. But for now, I’d say the shares are probably close enough to fair value.



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