Small Cap Value Report (Fri 15 Mar 2019) - IRV, BOO, RTN

Good evening/morning, it’s Paul here with the usual placeholder.

I’m hoping that there won’t be much news, as I have to go into the City for a lunch.

The way things are panning out with the Brexit shambles/deception, I think it’s becoming pretty clear that it’s likely to be deferred, perhaps indefinitely. Therefore, I’m starting to think we might see some confidence begin to return to small caps. For that reason, I’m building up a shopping list of irrationally over-sold small caps, with a view to pouncing, once buyers begin to return.

I think we might begin to see some nice uplifts, on positive newsflow from now on, as buyers return.

Offset against that, I’m worried that open-ended small caps funds might be suffering redemptions, and hence need to sell stuff even if they don’t want to. Having been through several bear markets before, I’ve seen how funds tend to sell whatever they can, rather than what they want to sell.

Another quandary, is whether to hold on to highly-rated small caps which have avoided the sell-off so far? Or whether to ditch them, on the basis that in line results probably won’t deliver any further upside, but even a slight disappointment could trigger a plunge?

Whatever you do, don’t fall into the trap of thinking that your brilliant stock picks are impervious to a bear market – pride comes before a fall – as I’ve learned the hard way!

It’s game over here. It looks as if shareholders over-played their hand, and the debt providers just wiped them out, with a pre-pack administration. Note this announcement after the market close, which starts of by saying;

Administrators have been appointed to Interserve Plc (in administration) (“Plc”) and the completion of the sale of Plc’s business and assets (i.e. the entire group) (the “Group”) to a newly incorporated company to be controlled by the Group’s lenders has occurred…

The new company is being refinanced through new equity (replacing the old debt), plus additional funding.

This looks by far the best route to take, as it avoids disruption to customers amp; employees. As for existing equity holders? Well, they’re irrelevant. Once any company/group is overwhelmed with debt, then the equity holders rank behind debt holders. Hence shareholders lose control of the situation if they are not prepared to stump up fresh equity on acceptable terms to the lenders. Debt holders (e.g. banks, bond holders) can force a company into immediate administration.

This is a good reminder of why it’s usually best to avoid heavily indebted companies. It’s also a reminder that the whole sector of facilities/support services/outsourcing/infrastructure, etc is such a disaster area. The model of highly geared groups, bidding for low margin but complex projects, is completely broken. Personally, after seeing so many failures in this area, I wouldn’t go near anything in this sector. Why take the risk, when so many have gone wrong?

Let’s hope that the Government applies some simple rules on balance sheet strength, to make sure that future contractors won’t go bust? Maybe I should offer my services, in return for a modest fee, to the Government amp; civil service, to prepare such rules? Since they don’t seem to have a clue on this issue.

The downside of course, is that if the Govt does insist on its contractors actually being solvent, then the cost of projects is likely to go up.

Board changes – now a £2bn market cap group, this is way above my normal size company for inclusion here. However, myself, and many readers, made fantastic profits from this share in 2015-217, when it more than 10-bagged from the lows. So I like to keep an eye on it.

Also, note that BOO shares have been one of the few growth stocks to survive the recent market sell-off reasonably intact.

I wondered whether Mahmud Kamani would be comfortable taking a back seat. Knowing him, my feeling was definitely not! Sure enough, he’s fallen out with the outsider Chairman, who has left. Mahmud has stepped back up, to Executive Chairman. I think that’s the right role for him. As co-founder, driving force behind the group, and a workaholic, I never saw him being happy taking a back seat role.

It will be interesting to see how long the new CEO, John Lyttle, formerly of Primark, will last. He started on Friday 15 March 2019. I’d be surprised if he’s still in that role in 6 months’t time, but you never know!

BooHoo is in the classic situation of being originally a small, highly entrepreneurial business, which is now being pushed to behave more like a larger, stock market listed company. I’m not terrible keen on that type of pressure. In my view, companies often seem to go wrong, when they stop being entrepreneurial, and turn all corporate. Just look at Superdry (LON:SDRY) to see how performance went badly wrong, when professional managers took over from the founder entrepreneurs.

From an investment point of view, I don’t really care if companies behave, or structure themselves inappropriately. As long as the founders are in there, running things well, and making money for shareholders, then I couldn’t really care less whether or not they comply with traditional rules on how the Board is structured, etc.. It only becomes a concern if they’re flouting the rules, and performing badly.  Successful entrepreneurs often do things differently. I think it’s important to allow listed companies with entrepreneurial management, to have some flexibility. Hence why I would back Mahmud Kamani any day of the week, over the outgoing Chairman.

Another one that’s slightly above our normal size limit here.

I’m pointing it out because the market reacted positively to final results, with the shares up 10% on results day. That’s unusual right now, hence worth taking a look.

The core business of under-performing, outdated, Frankie amp; Benny’s sites, has recently been enhanced with the debt-fuelled acquisition of Wagamama. I really don’t understand the popularity of Wagamama, since you can replicate its menu so easily by buying a packet of noodles for about 25p from Aldi, putting in some sliced meat of your choice, and topping it with a little spring onion. Still, if they’re able to persuade people into paying about 8 times cost price, for such simple food, then good luck to Wagamama.

There’s nothing else of interest on Friday’s RNS.

Sorry this is late, but I came down with a cold, so spent Fri amp; Sat in bed.

Regards, Paul.

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