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Small Cap Value Report (Fri 21 Jan 2022) - PHTM, ECEL, OTMP, WRKS

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Good morning, it’s Paul amp; Jack here with the last SCVR for this week. We’ve been so busy with numerous company updates, that the whole week has gone by in a blur, I can’t believe it’s Friday already. If it’s quiet for news today, then we have plenty left over from earlier this week to circle back to.

Jack amp; I will be recording another weekly summary audiocast this afternoon at 14:30, so I’ll post a link here later today – should be up by 15:30. Please bear with us, as we tweak the format, and trial various ideas. Over time we’ll improve audio quality, and where we publish it. At the moment I’m just publishing the audio on my personal shares website, for convenience. There’s now a donate button for ZANE on there, if you’re feeling generous.

Agenda -

Paul’s Section:

Photo-me International (LON:PHTM) – a controversial takeover bid at 75p cash, from the CEO (largest shareholder). Where’s the bid premium? This looks a poor deal for small shareholders, who have endured the losses amp; uncertainty from the pandemic, only to see the post pandemic upside now being taken away from them by the CEO.

Onthemarket (LON:OTMP) (I hold) – when is a profit beat not a profit beat? When they decide to start capitalising development spending! Overall, this update reassures rather than scintillates.

Works Co Uk (LON:WRKS) – a very good update. This looks good, with strong trading, and divis likely to resume. Digging a bit deeper though, the cash pile is needed to pay heavy trade creditors, so not surplus cash. In the absence of broker forecasts, I crunch my own numbers, concluding it’s pretty good value, but not as cheap as it looked at first glance on that eye-catching £15m EBITDA guidance.

Jack’s Section:

Eurocell (LON:ECEL) – strong sales momentum and FY profit before tax to be slightly ahead of the consensus figure of £26.5m. Ongoing cost inflation is being mitigated by price increases and surcharges. There are also a couple of growth projects that should help the group in the medium term. It’s not the kind of stock that has ever traded at a premium valuation though, so I wonder about the upside from here.

Preamble from Paul

People seem to like my general market/macro ramblings, so I’m getting up very early to do more of them.

Some snippets of recent news that caught my eye -

US markets continue to be under pressure. In particular, the £COMP is now down over 10% from its recent peak, in a rapid move down. Even the biggest tech shares are now falling (although still near highs mostly for the mega techs), partially masking much bigger falls in many highly rated, rapid growth shares.

Netflix – plunged 21% to $405 in after-hours trading last night, as earnings beat, but subscriber growth outlook slowed. It peaked at c.$690 in Nov 2021, and has since fallen 42%. It still looks too expensive to interest me.

Peloton – a glamour stock of lockdown in 2020, peaking at $160 in early 2021, is now just $24 – a drop of 85%.

There are loads of other examples of US shares where people ignored valuation, assumed rapid growth would carry on forever, and have been brutally reminded by Mr Market that valuation does matter, and rapid growth eventually reaches a ceiling, as competition is attracted by the opportunity.

Personality cults - are a typical feature of speculative bubbles. Fallen angel Cathie Wood has totally lost the plot now, claiming that her wildly over-priced momentum stocks are cheap, and that there’s a stock market bubble – in value shares! Why do people find it so hard to admit they got it wrong? How long before Elon Musk loses his cult-like shiny gloss? I think the clock is ticking there, before Tesla shares return to earth (with a re-usable rocket?!) in valuation terms. Tesla the company is doing well of course, but the shares’ valuation is at least 10x what seems reasonable to me (disclosure: I’m short of Tesla shares, but like the cars!).

Inflation – inflation is all around us now, for how long, nobody knows. Probably quite a while, as companies reporting in my space are often only talking about price rises now, yet to be implemented in many cases.

BT has announced a whopping 9% rise in its prices for internet amp; landlines. Although it says that’s only £3.50 per month per household, on average. I don’t begrudge paying more for internet, as it’s vital. But paying for a landline that I don’t want is really irritating, literally gathering dust, and serving one function only – to allow one elderly relative to ring me occasionally, as she flatly refuses to call my mobile, even in an emergency.

Lots of other costs are going up too, as we know. Although inflation is an annual measure, and if supply chain pressures ease, then the pressure to continue raising prices would also ease, and the annual rate could fall back again in 2023 possibly? Who knows. That’s what happened in 2008 and 2011, when (from memory) spikes in the cost of oil, and forex movements drove up inflation, which then washed through the system and returned to normal, as you can see below -


[Source: ONS]

Remarkably, as you can see from the graph above, we’ve not had persistent, problematic inflation since the late 80s, early 90s, when the Lawson boom turned to bust. So why would it return now?

We have had massive asset price inflation though, which isn’t measured in the official consumer price index figures.

Supply chain - possibly some positive early signs of improvement? The Times says freight rates are now falling, and the supply chain crisis could be over. Do any readers have expertise in this sector, if so please do post a comment about what’s going on.

Doing some googling, I see that the Baltic Dry Index has indeed plummeted (source: here) -



I don’t know how that feeds through to costs of container shipping though, which is probably more relevant for most of the shares I cover, importing containers from the Far East, rather than the raw materials covered by the Dry Index.

The only chart I could find on the cost of container freight shows very high rates still -


[source: here]

With thanks to both websites, for their charts – I hope it’s OK for me to copy them here.

The other question is whether UK companies book their freight costs in advance, or just pay spot rates? Companies should be disclosing this. It seems to me that a key risk has emerged in this area, forward contracting the cost of freight looks very important. The same with utilities, and digital marketing costs – these highly volatile costs can make or break companies that haven’t hedged their costs or secured long-term pricing (if possible).

The danger now might be that CFOs lock in long-term deals at elevated prices, so it’s very tricky knowing when to fix costs (if you can at all).

Anyway, I’m only bouncing ideas around here amp; trying to figure out what’s going on, none of the above is my area of expertise, so I encourage readers to DYOR and post comments if you have expertise in these areas.

Demand distortion? I had an interesting chat with a friend yesterday, and he reckons that the shift from people buying holidays/entertainment to buying physical stuff during the pandemic (which is mainly what has caused the supply chain problems, according to Fed Chairman Powell, since import volumes are up 20%) – could have pulled forward demand for consumer durable goods. So he reckons we should be careful not to assume that bumper profits generated by some companies in that sector in the last year or two will carry on.

That’s certainly helped cause the big de-rating of eCommerce shares. Although I reckon there could be an opportunity now, with possibly structural, normal rates of eCommerce growth returning in 2022, showing that these are still growth companies. It’s just that growth was pulled forward into 2020, then plateaued in 2021, it hasn’t stopped altogether. Growth could resume in 2022, who knows?

There’s a lot of uncertainty out there at the moment, so shares are particularly hard to value.

I think it’s essential to keep away from anything on a really punchy PER, and with high growth assumptions at the moment – given that these are very much the shares that are being sold off so brutally in the USA. We seem to follow the USA, in everything. The slightest disappointment in growth rates, and shares collapse, as we saw with Netflix last night.

Or, a contrarian might see these as buying opportunities, for growth companies that are now more reasonably priced? I’ve been looking at US companies, and the trouble seems to me, that even after huge falls, a lot of growth companies still look too expensive on conventional metrics, like price earnings, or price to cashflow.

I’ve never accepted price to sales as a sensible valuation metric, because it ignores margins. Hopefully we might see that valuation method come under more scrutiny.

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: Photo-me International (LON:PHTM)

75.6p (y’days close) – mkt cap £276m

Mandatory Cash Offer

I think there are likely to be a lot of miffed private shareholders here today, and bulletin boards overflowing with indignant messages.

The CEO, Serge Crasnianski wants the upside for himself, so has bid 75p cash (no premium) to buy the whole company.

He already held 28.8% of the company, and is buying another 7.7% (at 70p), which has triggered a mandatory bid under the Takeover Panel rules (going over 30% requires a bid, unless an exemption has been agreed).

The announcement says borrowings have been lined up through Credit Agricole Bank to finance the cash bid.

My opinion – this looks a bum deal for smaller shareholders, because there’s no bid premium. We don’t buy shares to have the upside whipped away from us, especially for people who held during the difficult pandemic times, and now face losing the upside on post-pandemic recovery. That’s not nice, but I suppose people can always vote against the deal, and refuse to sell their shares. But where would that leave things? Someone controlling the company who doesn’t want external shareholders involved.

The share price had been rising recently, and it was tipped as a main buy recommendation a few days ago in SCSW magazine, which might have pushed up the price, or it could have been insider dealing from persons unknown who knew a 75p bid was coming possibly?


There’s been no dilution during the pandemic, with 378m shares in issue for quite a few years now.

The forward PER is only 9, and the company’s prospects have been improving. Although there has always been inadequate information about which divisions generate the profit, and the longevity of photo booths (almost certainly the main profit generator) is in doubt.

Looking at the shareholder register, the bidder already holds the biggest (pink) wedge, and looks like they’ve just bought the green wedge, as that’s 7.7%. Therefore, the decision is going to be made by the 3 remaining large holders – Schroders, Fidelity, and Montefiore. If they agree it, then this looks a done deal. Hopefully they might negotiate hard for a higher price for everyone – over to you, Andy Brough (Schroders), kick some ass!

In less liquid shares like this, institutions often welcome a liquidity event, of a takeover bid, as it enables them to exit and move on. That might be different to how PIs view the situation, as we can sell any time in the market.


Onthemarket (LON:OTMP) (I hold)

121p (up 1.7% at 09:01) – mkt cap £90m

Trading Update

OnTheMarket plc, the majority agent-owned company which operates the property portal, is pleased to announce the following update on trading.

Company headline -

Adjusted operating profit1 ahead of expectations

The current financial year ends on 31 Jan 2022, imminently.

Trading sounds quite good -

The Group’s operational performance has continued to be strong through H2 21/22 and revenues for the full year ended 31 January 2022 (“FY 21/22″) are now expected to be slightly ahead of market consensus.

The Company’s focus on disciplined operational and cost management has continued.

Profit guidance – is positive, but has a sting in the tail – development spending is being capitalised, which boosts short-term profits. We need to know a figure on that, to ascertain how much of the improved profit is due to this accounting policy change. That’s not provided, so we’re in the dark, and that’s why the share price hasn’t changed much, I reckon -

When combined with a higher level of development investment in the new website and brand launch that will be capitalised rather than expensed as incurred in the income statement, the Group now expects adjusted operating profit1 to be positive in H2 21/22 and to be at least £2.5m for the full year FY 21/22.

Outlook - unchanged from last update.

My opinion – I like the strategy of the newish CEO, who seems to have injected some impetus into the business, with fresh ideas for developing the services provided to estate agents amp; website visitors.

Subjectively, I thought the latest TV ad was quite good (can’t find it on youtube). Previous ads had a group of people singing a catchy tune. I’ve told you this before, but I’ll never forget the facial expression of the former CEO when I sang his own jingle to him, in an investor meeting at Shore Capital’s office! (It had just been on the radio. I’ve not been invited back, strangely, probably due to the pandemic). In my head, the jingle merges with the Village People – “On the market” to the tune of “In the navy”. But that’s just me.

OTMP is generating decent subscription revenues now, and covering its own costs. So as long as the CEO doesn’t blow the cash pile on marketing amp; do another placing, then I’m happy with the speculative upside here.

As a wild card, shrewdie Christopher Mills, spoke very highly about OTMP in a recent interview with Paul Hill on Vox Markets. He said that his fund, Harwood, is sitting on the market (!!) bid, mopping up OTMP shares, but just can’t get enough. It surprised me that he would reveal this, as it greatly improves risk:reward for me – knowing that there is a large buyer in the market, mopping up any sellers, puts a floor under the price presumably?

Overall then, I find today’s update reassuring, rather than earth-shattering.

I do love Paul Hill, he’s so irrepressibly enthusiastic about the markets! I’ve told him he interrupts too much, but he just said he can’t help it, as he gets so excited, lol! Christopher Mills has a fantastic track record, so well worth listening to.

OTMP is mentioned from 15:10


Works Co Uk (LON:WRKS)

63p (up 12% at 10:00) – mkt cap £40m

Interim results

The Works, the multi-channel value retailer of arts and crafts, stationery, toys, and books announces its interim results for the 26 weeks ended 31 October 2021 (the “Period” or “H1 FY22″) and an update on current trading.

H1 revenues +17.9% over pre-pandemic levels – looks good, but the period covered (May-Oct 2021) had (I think) unrestricted trading, and may have benefited from pent-up demand from the lockdown in early 2021?

Like-for-like (LFL) figures are always more useful, as this strips out the effect of new store openings, and store closures, to give underlying performance – and this does look good -

Strong two-year LFL (1) sales growth of 14.5%, ahead of the Board’s expectations. Store two-year LFL sales increased by 7.3% and online sales by 80.7%.

Still loss-making in H1 though, but at least a positive EBITDA means it should be generating some operating cashflow -


Cash is up a lot – which surprises me, so I’ll look into where that cash has come from -

Further strengthened balance sheet as net cash balance increased to £17.8m (H1 FY21 £9.3m).

Current trading – they say it’s strong, but has slowed from the +17.9% in H1 (vs 2 years ago) -

Sales in the 11 weeks since the end of the Period have remained strong, with a two-year LFL growth of 9.0%.

EBITDA guidance – this looks very strong, and suggests there must be a heavy H2 seasonal bias, as H1 was only £2.5m, so H2 would be £12.5m – that’s a lot for a company with a £40m market cap! –

Overall good trading performance is expected to more than offset significantly increased container freight costs; Pre IFRS 16 Adjusted EBITDA for FY22 is forecast to be approximately £15.0m, assuming no further COVID related impact on trading, ahead of the Board’s previous expectations.

Dividends – we’re told divis are back on the agenda, if actual results for FY 4/2022 are in line with guidance.

EBITDA/PBT - I’m obviously quite taken with that £15m EBITDA forecast, so am looking back to previous results to determine how much of EBITDA turns into actual profits.

The company reports pre-IFRS 16 EBITDA, which is good, because that properly accounts for rents on leases. Whereas post-IFRS 16 EBITDA is absolutely meaningless, because a lot of the rents by-pass this figure and end up lower down, in finance charges.

Here’s the previous pattern:

FY 4/2021: Adj EBITDA £4.3m becomes adj PBT of £(3.6)m loss, worse by £7.9m

FY 4/2020: Adj EBITDA £10.8m becomes adj PBT of £2.4m profit, worse by £8.4m

FY 4/2019: Adj EBITDA £13.9m becomes adj PBT of £6.9m profit, worse by £7.0m

If we take the average of the 3 previous years, adj PBT is £7.8m worse than adj EBITDA. Therefore the £15.0m EBITDA guidance for this year (FY 4/2022) becomes £7.2m adj PBT for this year. Take off say 25% tax (in future years, so I want to use that rate now), is £5.4m earnings, divided by 62.5m shares in issue = 8.6p per share. At 63p per share that’s a PER of 7.3 – which looks good value.

That’s the current year though, what happens when business rates, a substantial fixed cost, kick back in again in future years?

Unfortunately, I can’t find any broker research, but I imagine with big cost headwinds on the way (rising wages and business rates resuming, in particular), it might be difficult for WRKS to grow profits any further, any time soon? But that depends on future sales growth, and future gross margins, which are unknown, as they are for almost every company.

Business rates relief – I’m raising a question mark over this. It’s not clear how much benefit WRKS received from business rates relief in H1 TY. However, note 1 (b) (iii) mentions re-stating last year’s numbers to move the business rates relief from operating income, into cost of sales. Fine, it doesn’t change the overall profit result last year. But it’a a massive number: £7.2m in H1 LY. My question being, how much of this year’s profit is coming from business rates relief? It could be highly material, if it’s anything like last year’s number, and of course it’s being phased out. So a very large headwind for next year, by the looks of it.

Business Rates Relief

In the FY21 interim accounts, business rates relief was disclosed within other operating income, with cost of sales including the gross rates payable figure. This treatment did not accord with required practice and therefore these items have been restated in the comparative figures. The business rates relief is now reflected via a £7,215k reduction in cost of sales (from £85,219k to £78,004k) with a corresponding reduction in other operating income (from £12,276k to £5,151k). There is no impact on the overall H1 FY21 result.

Balance sheet – NAV is £10.2m, less intangible assets of £2.3m, gives NTAV of £7.9m – at least it’s positive.

IFRS 16 lease entries are £102.8m RoU asset, less £27.9m + £94.5m liabilities, a net position of £(19.6)m deficit.

Eliminate these entries, and NTAV would rise to £27.5m, which is actually quite healthy. Although most of that is made up of arguably worthless (resale value) shop fittings.

I don’t see any risk of insolvency, whilst trading remains positive.

Cash generation looks amazing, but it’s heavily boosted by favourable working capital movements (around £20m benefit in H1!). It looks like H1 benefits from a seasonal improvement in working capital, which then reverses somewhat in H2, judging from last year’s numbers.

Trade payables are enormous at £64.3m, so the cash is going to be needed to pay these down. Last year trade payables dropped by £28.2m in H2, for example.

So don’t get carried away with the “half the market cap is cash” argument. I would treat the £17.8m cash pile as being a favourable, seasonal blip, rather than genuinely surplus cash. I’d like to know the average daily cash balance, which I suspect would be considerably lower.

My opinion – the outlook for this company has clearly improved tremendously, compared with in the early stages of the pandemic, when it looked precarious.

I can see the appeal of the shares, but on closer inspection, it’s not as cheap as it initially looked.

Overall not bad though, and the product ranges are interesting, with not much competition on the High Street. I can imagine this share might have further to run. It looks like one of those companies that has been improved during the pandemic, and managed to get through it without diluting shareholders. However, remember that this was a troubled company before the pandemic hit, having flopped after listing, and has a real question mark over what it was for, why it existed, and would it go bust if negative trends continued. Then the pandemic hit. Has it really been transformed into an amazing company over the last couple of years? It’s a lot better, for sure, but I’d like to know .

I’m also worried that profits may be receiving an unsustainable, and large benefit from business rates relief. It was £7.2m in H1 LY (last year) for example. It might be less this year, but could still be boosting profits artificially amp; unsustainably. That’s the big question that investors need to find the answer to.



Jack’s section Eurocell (LON:ECEL)

Share price: 266p (+3.5%)

Shares in issue: 111,972,477

Market cap: £297.8m

Trading update for the year to 31 December 2021

This is a vertically integrated UK manufacturer, supplier, and recycler of PVC products.

Eurocell’s strong sales momentum has continued in the last two months of the year, supported by good underlying demand in its markets. Having navigated ongoing cost inflation and supply chain pressure so far, the group expects profit before tax will now be slightly ahead of expectations.

The analyst consensus profit before tax forecast for 2021 is £26.5m.

Group sales for the six months to 31 December were up 23% on 2019 comps and up 7% year-on-year (with 2020 having a very strong second half). Full year revenue was £343m, up 23% on 2019 and 33% on 2020.

Here’s the divisional breakdown:


Demand in the repair, maintenance, and improvement (RMI) market has moderated from unprecedented levels seen in H2 2020 and H1 2021 but the sector ‘remains strong’ going into 2022. Profiles (+22% on 2019) has benefitted from good contributions from trade fabricators and another strong performance from Vista Doors. New build sales have improved in H2 ‘as housebuilders focus on achieving year end completion targets’.

Building Plastics was positive across Eurocell’s own-manufactured products and traded goods, supported by a strong order book, with 12 new branches opened in the year (taking the total estate to 219 sites). Four of these openings are a new, larger format.

Eurocell expects raw material constraints to ease over the coming months and has so far mitigated cost inflation with selling price increases and surcharges. Price inflation became a larger part of sales growth as the year progressed.

The group’s recycling plants have also ensured its supply of resin. This seems like a slight differentiator.

These plants supplied 27% of our raw material consumption for the year (2020: 25%), driving significant cost and carbon savings compared to the use of virgin material.

That’s a respectable figure. I wonder if there is room to grow this?

Net debt ex-leases was c£11m as at 31 December 2021, down slightly on £10m a year earlier, and reflecting the ‘substantial’ impact of inflation on working capital.

New Warehouse and Manufacturing Capacity Expansion – fit-out of a new state-of-the-art warehouse is complete. This will increase capacity and operational efficiencies. Management is ‘optimistic that operating performance will exceed our original expectations’.

The 2021 manufacturing capacity expansion, including 5 new extrusion lines, together with the associated mixing plant upgrade and tooling, is also now complete. Another 5 lines will be added in 2022. The combined investment will increase extrusion capacity by more than 15%.

Diary date – full year results to be released on 18 March 2022.


This looks good – not just in terms of the market backdrop, which appears set to remain favourable, but in Eurocell’s significant growth investments which should allow it to capture more market share.

It looks like the group was consistently growing revenue pre-Covid.


Financial health scores are positive, as are the profitability metrics. Although operating margins and returns on capital have been on a declining trend. I wonder what’s driving this – competitive pressures, rising costs?


Still, the track record so far is enough to generate a strong Quality Rank of 97.

It doesn’t look like Eurocell has ever traded on particularly high multiples, so today’s forecast PER could be fair value. Possibly on the cheap side given the outlook and growth initiatives but then again there is the declining margin trend and cost inflation to consider.

PBT will be slightly ahead of £26.5m, so let’s call it £28m. After subtracting a notional 20% tax charge, that would make for 20p of earnings per share and an FY21 PE ratio of 12.8x. I suspect the valuation is about right given its industry, although the company does appear to be executing well.

A good operator perhaps, but one I’d be more interested in at a bit of a discount.




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