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Small Cap Value Report (Mon 8 Nov 2021) - DX., DTY, CBOX, CARD

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Good morning, it’s Paul amp; Jack here with the SCVR for Monday.

David and the team are back with another Mello Monday tonight, they’re always worth checking out with some interesting management presentations this time around including Property Franchise (LON:TPFG) and Sosandar (LON:SOS) . You can find more detail here.


Paul’s Section:

Cake Box Holdings (LON:CBOX) – impressive H1 results, with quite a rapid roll-out of new sites, funded amp; operated by franchisees. No supply chain problems. The valuation still looks reasonable, so I suspect this share could continue to do well.

Card Factory (LON:CARD) – the most encouraging update we’ve seen since the pandemic began. Store sales have now improved to almost reach pre-pandemic levels, driven by largest basket size, on still much reduced footfall. Net debt is still worryingly high though, but the situation overall does seem to be improving.

Jack’s section:

DX Group (LON:DX.) – operational leverage, volume improvements, and market share gains have driven an increase in profits as the turnaround here looks to bear fruit. Conditions are currently positive- these could moderate and there are headwinds, but the company continues to invest for growth. There’s been a substantial increase in the share price recently which makes me warier, but brokers retain quite aggressive price targets of 55p-57p.

Dignity (LON:DTY) – management has changed and the turnaround strategy focuses on reducing prices and increasing volumes, which looks to be the right move. There’s more to be done, however, and the group continues to lose market share. The financial picture is also a concern. The group says it will ‘have a lot more to say at the year end’.

Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to review trading updates amp; results of the day and offer our opinions on them as possible candidates for further research if they interest you. Our opinions will sometimes turn out to be right, and sometimes wrong, because it’s anybody’s guess what direction market sentiment will take amp; nobody can predict the future with certainty. We are analysing the company fundamentals, not trying to predict market sentiment.

We stick to companies that have issued news on the day, with market caps up to about £700m. We avoid the smallest, and most speculative companies, and also avoid a few specialist sectors (e.g. natural resources, pharma/biotech).

A key assumption is that readers DYOR (do your own research), and make your own investment decisions. Reader comments are welcomed – please be civil, rational, and include the company name/ticker, otherwise people won’t necessarily know what company you are referring to.

Paul’s Section Cake Box Holdings (LON:CBOX)

397p (up 4.5% at 10:07) – mkt cap £159m

Unaudited Half Year Results

Cake Box Holdings plc, the specialist retailer of fresh cream cakes, today announces its half year results for the six months ended 30 September 2021 (“H1 FY22″).

Record first half performance with further strong growth and strategic progress

I wish all company accounts were as simple, and easy to understand as these! There aren’t any adjustments, it all looks very clean.

The balance sheet is strong, including £4.15m net cash.

Cash generation is good, funding a small amount of capex, and divis.

Current trading is good, and full year expectations are confirmed.

Revenues are low at £16.5m, because it’s a franchise business

Stripping out new store openings, like-for-like revenues are up 13.3% in the 4 months of comparable trading in 2021 vs 2020 – showing strong underlying demand.

Profit before tax in H1 of £3.7m is up a very strong 122% on H1 LY, helped partly by worse lockdowns last year than this year, and of course the roll out of new stores.

EPS: 7.46p in H1 (up 116% – very impressive)

2.5p interim dividend

No supply chain issues, and several months ingredients are on hand – hence very little risk of a profit warning from supply chain disruption.

7 kiosks opened in ASDA, with more being rolled out in future.

Valuation – we like CBOX a lot here at the SCVR. It’s established a really good track record of not only prospering throughout the pandemic, but also opening many new franchised stores.

Is it a reasonable price though?

Stockopedia shows broker consensus of 13.4p FY 3/2022, rising to 15.1p for FY 3/2023. Those numbers seem light, given that we’ve already had almost 7.5p reported for H1 today, and there seems to be a profit bias in H2 (although that could be due to new store openings). Hence it looks to me as if something like 16-20p EPS might be more realistic for this year perhaps?

Many thanks for Shore Capital, for issuing an update note today on Research Tree, showing a forecast of 14.7p for this year, and 16.3p next year. That’s higher than consensus, so we should expect to see further increases in consensus forecast.

What figure should we use to value the shares? Given that CBOX is a reliable roll-out, then rising profits are almost certain. Hence I’m prepared to push the boat out, and base my valuation on a future EPS figure of about 20p, which looks within reach for next year.

Hence at 397p, the PER is about 20 – certainly not excessive. I think that can be fully justified by strong performance, and continuing expansion of store numbers (cape all funded by the franchisees remember).

My opinion – a very nice business, and its shares have shrugged off the recent sell-off in many small caps.

Have we missed the boat – i.e. is it too late to buy, after such a good run up in share price?

I’d say not, this still looks an attractive roll-out, with plenty more growth in the pipeline, and a valuation that looks reasonable to me.

Well done to investors in CBOX, you’ve picked a winner.



Card Factory (LON:CARD)

54p (up 10% at 11:16) – mkt cap £185m

Trading Update

Card Factory plc (“Card Factory” or “the Company” or, together with its subsidiaries the “Group”), the UK’s leading specialist retailer of greeting cards and complementary products, today provides an update on the Group’s trading and operations.

This update reads positively. Trading is continuing to recover.

Q3 (3 months to 31 Oct 2021) saw revenues only -3% pre-pandemic equivalent.

What is striking is that transaction volumes are down heavily, at -20.9% compared with pre-pandemic Q3. However, much higher basket size, +22.5% recoups most of the shortfall, hence revenues down 3%.

We can confirm these numbers ourselves, using 100 as the base turnover. Deduct 20.9% for lower volume, giving 79.1%. Then multiply by 1.225, to reflect higher prices. Arriving at 96.9, so -3.1% revenues.

This seems to confirm a trend that people are going into towns to shop less, but buying more when they do visit. Which is very encouraging for high streets generally, if this pattern continues.

Supply chain problems sound contained, and at a modest level, so the company reassures on this topical issue.

Net debt - still the main problem at this company, with an equity raise still needed. Although as the performance of the company improves, it might well be that the bank manager is sleeping better at night now? So I imagine risk is probably reducing.

Net debt, which is typically at its annual high due to stock purchase in advance of the Christmas season, as at 31 October 2021 was £108.4 million (excluding £20.8 million of deferred rents and VAT), compared to net debt of £142.5 million (excluding £13.2 million of deferred rents and VAT) on 31 October 2020.

My opinion – things are clearly improving at CARD, and the risk of a highly dilutive equity fundraising is probably receding somewhat.

With revenues now close to pre-pandemic levels, the stores should be operating profitably again by now, and generating good cashflows. That holds out the possibility that the company may not need to do a dilutive equity raise, or not dilute as much as previously feared.

The big disappointment with CARD is that it missed the boat with online greetings cards, as Moonpig (LON:MOON) and others grabbed an opportunity worth over £1bn from under its nose. To date, CARD’s online offerings have been lamentable. Although there’s always a chance that CARD could develop a more convincing online strategy, and drive growth in that way in future.

As regards the stores, they’re facing big cost headwinds when business rates return to normal, plus the gt;6% rise in living wage from April 2022. Lower rents are likely to help in the other direction though.

Putting it all together, I’m happy to sit on the sidelines because net debt is still perilously high. Although this is the best update so far, since the pandemic started, and I think it’s starting to look potentially interesting, if you’re happy to ignore the risk of equity dilution and hope for the best on that point.

Remember that CARD was doing badly before the pandemic struck. So don’t necessarily expect an instantaneous recovery all the way back up to previous highs. The previous policy was paying out excessive divis, and running excessive debt, so hopefully the company will be more prudent in future.



Jack’s section DX Group (LON:DX.)

Share price: 33p (+3.94%)

Shares in issue: 573,682,000

Market cap: £189.3m

DX Group provides a wide range of delivery services to both business and residential addresses across the UK and Ireland. It was first established in 1975 as a Document Exchange service to the legal sector, but this is now an increasingly small part of the overall company.

It has one of the widest ranges of overnight delivery services in the market, as well as logistics services. DX Freight comprises DX 1-Man, DX 2-Man and Logistics. The division specialises in the delivery of irregular dimension and weight freight (“IDW”).

DX Express comprises DX Parcels and DX Exchange and Mail. The division specialises in the express delivery of parcels and documents.

Amid all the demand for products from both companies and customers, the group’s share price performance has been impressive. It has risen from a lockdown low of 6.75p to some 31.75p today, well ahead of its pre-Covid levels of between 12p and 15p.


Final results

Very strong results… Group is well-positioned and further progress is expected


  • Revenue +16% to £382.1m,
  • EBITDA +55% to £38.6m,
  • Underlying operating profit +266% to £16.5m,
  • Adjusted PBT up from £0.2m to £16.5m,
  • Adjusted EPS up 2.1p from a loss of 0.1p to 2p,
  • Net cash +37% to £16.8m,
  • Cash flow from operating activities down from £33.5m to £28.1m following a c£14.5m swing in working capital payments.

These results show the group is on track in its turnaround plans set out in 2018. The adjusted operating margin also improved to 4.4% (2020: 1.4%), moving towards the long-term target of 7.5%-10%.

This strong performance was largely driven by the DX Freight division, which saw revenues and profitability significantly increase as a result of higher volumes, greater operational leverage, and efficiency improvements.

Freight revenue rose by 32% to £223.0m and operating profit increased from a loss of £0.6m to a profit of £22.9m, pushing the divisional operating margin up to 10.3%, which is above the wider company’s long-term target. Three new depots were opened in Oxford, Westbury, and Burnley, while another three were upgraded.

A strong focus on customer service has supported new business wins and customer retention, meaning the division has strengthened its market position from a year ago. Market share gains have been further aided by the withdrawal of a competitor from some parts of this market.

This in turn has improved volumes, efficiency, and productivity through greater delivery densities and improved utilisation of existing capacity.

The high operational leverage has led to a significant recovery in the division’s margins, as additional volumes do not require a commensurate rise in fixed costs.

We estimate that the market for parcel freight is expanding at approximately 10% per annum, with Brexit driving some of this growth as businesses increasingly ‘on-shore’ their supply chains in reaction to the frictions of cross-border trading and the impact of coronavirus pandemic. Our growth of 32% compares favourably with the overall parcel freight marketplace, and our strategy for DX 1-Man is to continue to expand its market share and to improve margins by increasing efficiency and productivity.

Opening new depots has several beneficial effects: it reduces stem miles; improves the ability to win new business in the local area; enhances service levels by being closer to customers; and increases vehicle productivity by enabling double delivery runs on certain routes. There are growth opportunities for the 2-Man amp; Logistics business, boosted by the trend towards outsourcing.

As the division grows, DX expects to further improve operating margins.

DX Express performance was significantly impacted by lockdown, but strong progress was made in the growth of its Parcels activity.

DX Express revenue was stable at £159.1m (2020: £160.3m), although operating profit fell from £22.9m to £12.4m as lockdowns affected the group’s Legal and High Street activities. The separation of Document Exchange and Parcels delivery network is now complete. Three new depots opened in Glasgow, Rotherham, and Middlesbrough.

The cessation of the HMPO contract in the last quarter of the previous financial year has led to a different sales mix, and that the DX Exchange network was underutilised.

The parcels market is large and growing strongly, driven by the increase in online buying. It is presenting plenty of new opportunities, albeit the market is very competitive with a large number of providers. However, we are confident that our differentiated approach puts us in a good position to grow the division’s presence in this part of the market as we continue to build a profitable, high-quality, service-orientated parcels delivery service.

The group has now launched a major new capital investment programme, worth £20m-£25m over the next three years, in order to further expand its depot network and drive improvements in equipment and infrastructure. A total of £6m was invested in the financial year just ended (up from £3.4m), spent mainly on depot network expansion, equipment, and IT.

Balance sheet – DX has £44.5m of current assets excluding cash and £16.8m of cash set against £81m of current liabilities. There’s no debt but the group has established a £20m invoice discounting facility. Net assets are £39.8m, up from £23m. There’s £31.4m of intangibles and goodwill though, so net tangible assets are single-digit millions. A stronger position than the prior year, but still an area the group might look to improve.


Although there are ongoing trading challenges, including HGV driver shortages and global supply chain disruptions, the Board remains confident of further progress and DX continues to win new business and increase its market share


DX continues to win new business and increase market share, and the board is confident of further progress here. Margins have improved, albeit aided by an unusually strong demand environment that should moderate to a degree at some point.

When is hard to say, but the more company-specific factor here is a successful looking turnaround. Against a favourable backdrop, the company has shown its model can generate operational leverage and there is further scope for margin enhancement.

It’s not all plain sailing though. According to the group:

In recent months new challenges have emerged and the macro-economic environment has become more volatile. As well as recent shortages of HGV drivers and other logistics industry workers, the disruption to global supply chains has led to a number of customers experiencing stock shortages.

The group is implementing measures to address pressures, ‘and there are some early signs that issues are beginning to resolve themselves’.

Useful progress has been made in returning the business to long-term, sustainable profits growth and cash generation. Fair enough, that has been helped by favourable conditions, but there’s nothing wrong with fixing the roof while the sun is shining.

There are some challenges ahead but the company has ambitious growth plans for the next five years and has announced a £20m-£25m capital investment programme. The margin target of 7.5%-10% is well ahead of the 4.3% reported in these results.

If it can combine this with revenue growth then there could be further earnings growth and share price upside from here. Market share gains support this possibility, although there is still the possibility of current tailwinds moderating or headwinds intensifying. There has been a substantial uplift in value already and this has become a popular sector, however, which makes me slightly cautious at this point.

It’s a tough sector, but DX does appear to have a differentiated model in the space (focused on IDW and high value parcels and documents) where there is a bit more pricing power and service is more important. For what it’s worth, brokers continue to forecast good upside with improved price targets of 55p – 57p.

Dignity (LON:DTY)

Share price: 706p (-1.81%)

Shares in issue: 50,028,740

Market cap: £353.2m

Dignity was once a bit of a stock market superstar but it’s had a huge crash. There has since been a slight recovery, but the share price is still well down on its previous levels.


There have been some interesting developments here.

The old chairman was ousted by shareholders earlier in the year and the CEO, Gary Channon, is actually a partner at deep value investment specialist and major shareholder Phoenix Asset Management. So clearly management is aligned with shareholders.


Q3 trading update

  • Underlying (post-IFRS 16) revenue up a percent to £237m,
  • Underlying operating profit -10% to £43.4m,
  • Year to date (YTD) number of deaths -3% to 483,000.

The YTD decline in profitability results from both a fall in number of deaths and a drop in market share, as well as increased costs in the Funerals division. While profits have fallen here, Crematoria has proven more resilient with a slight increase in operating profit.

The third quarter has been ‘better’, with a 10% yoy increase in death rate driving a £2m increase in funerals profit to £7.2m. Dignity says it continues to lose market share in both funerals and crematoria, however.

Funerals underlying operating profit has fallen sequentially, from £22.2m in Q1 to £9.4m in Q2 and £7.2m in Q3, for a YTD contribution of £38.8m.

In the first three quarters of 2021 the group conducted 57,900 funerals (September 2020: 61,700) in the UK. Just over 1% of these were performed in Northern Ireland. Excluding NI, this represented approximately 11.9% of total estimated deaths in Great Britain. That’s down from the 12.2%in September 2020.

Market share is calculated based on a fixed assumption of one week between the registration of the death and the date of the funeral, however, and this relationship looks to have changed somewhat so those figures may not be comparable.

Crematoria underlying operating profit is also falling, from £14.6m in Q1 to £10.6m in Q2 and £9.2m in Q3, for a YTD contribution of £34.4m. Around 54,900 cremations have been performed so far in the financial year, representing a market share of 11.4% (September 2020: 11.5%).

Capital structure – Looks precarious. The group’s primary financial covenant under the Secured Notes requires EBITDA to total debt service to be above 1.5 times. The ratio at September 2021 was 2.11 times (June 2021: 2.12 times). That limits the group’s room for manoeuvre.

At the end of September 2021, the group held cash of approximately £68m, approximately £48m of which was held by Dignity. This looks like a risky position to me.

At the last balance sheet date, Dignity had £1,933m of total assets including £322m of intangibles and goodwill. Given the £2,069m of total liabilities, that makes for a negative NTAV of some -£458m, more than the group’s market cap. The £524.8m of debt (excluding capital leases) also exceeds it, which is clearly not prudent.

I would view further progress here as a requirement.

Turnaround strategy

There is considerable activity underway within the Group, as mentioned in the interim results statement, impacting all aspects of our business. This is driven by the strategic changes being made as well as preparing for and complying with new and evolving regulations in our industry. This reporting period includes a few weeks of trading with our new pricing, where we have launched competitively priced funeral services in the UK to truly lower the cost of dying for families, but it is still too early to judge and extrapolate the overall effect. Our average revenue per funeral has fallen, and volumes have risen as we expected, but coming as this does at a time of an elevated death rate it is still not possible to apportion the element of that growth that potentially could be attributed to market share, in part because the time between death and funeral has moved in reaction to that volume rise.

So there are signs that Dignity is taking the kinds of action required after being found out by competitors undercutting its services. As well as reducing prices and increasing volumes, Dignity is being reorganised into smaller, more autonomous regional groups. The fact that the group is not immediately hailing this new strategy as a success strikes me as suitably cautious.


Quarter four is going to be important but is still hard to predict so Dignity refrains from giving guidance.

Deaths were above the prior year in the first quarter with the second quarter falling below the five-year average (2015-2019). The third quarter saw an increase in deaths from the prior year and an increase above the five-year average. The impact of COVID-19 deaths in 2020 and 2021 could possibly mean we experience a lower number of deaths than originally anticipated by the Office of National Statistics (‘ONS’) in 2022 and 2023. The Group will not speculate on the most likely outcome.

Some might argue that the group can afford high levels of debt due to the predictable nature of its revenue and cash flows. The above comment does not appear to bear that out. Of course deaths will continue, and likely at a fairly steady rate, but the lack of guidance reinforces the view that the company should carry significantly less debt.


The group itself says that it ‘will have a lot more to say at the year end and look[s] forward to sharing an update then.’

So perhaps now is not the best time to assess its prospects given that more detail will soon be forthcoming. It’s probably worth keeping on a watchlist though, as change is happening here and this has been a well-regarded investment before.

There’s plenty of work to be done, however, and the group continues to lose market share. It can only regain this by cutting prices, and the medium to long term impact of that is unclear. Meanwhile the financial position looks weak. There are some comments on potentially undervalued freehold assets here, which could change the picture if correct.

There’s no rush to get involved at this point but I give some credit for the management commentary, devoid as it is of the hot air that clogs up many other overly-optimistic communications with investors. There has been no equity dilution so the turnaround opportunity remains intact, although it’s still risky.



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