One of my readers was bemoaning the fact that they couldn't find any bargain in the market despite the recent set back. So I did a bit of digging around and found some cheap looking small retailers that I have come across, although I stress I am just pointing them out - not recommending them - so you should do your own research if they interest you.
Now this is topical because after a soggy August in the UK the BRC are suggesting that retail sales slowed to crawl as a result with clothing retailers expected to be hit the most. However the report from Reuters does suggest this may have been a blip due to the late August Bank holiday which meant that back to school spend and summer furniture sales were not included.
Any way with that background I thought I would start by highlighting a furniture retailer which came back to the market earlier this year having gone bust previously. If that doesn't immediately put you off the stock concerned is SCS. Now they rather blotted their copy book or stained their sofa as it were when they warned about a General Election slowdown just after they floated. This caused the shares to fall below the issue price and as you can see in the chart below to be offered at up to 40% off their recent highs like one of their regular sales in store.
While you can't buy the shares on interest free credit, the interesting thing is that is seems to have been building a base around the 140p level and since then they have updated on trading over the remainder of the current year to the end of July. In this they confirmed that they trading in line with the down graded forecasts and were committed to paying out a big dividend. Thus if forecasts of a full year dividend of 14 pence are correct, this suggests they should pay a final dividend of 11.2 pence as they paid an interim of 2.8 pence back in May. Thus at a price of around 160p they would be yielding 7% on the final alone and a whopping soar away 8.9% if they maintain the dividend next year too. If they manage to hit next years earnings forecasts too then it may be on less than 12x, but obviously no guarantees with this one.
So obviously not a quality play and they earn pretty thin margins and slipped up just after floating, but could be an interesting high risk play on a pick up in consumer spending on the back of increasing real earnings and falling petrol and heating costs. I also note the gap on the chart at just under 220p which often get filled so this could be a medium term target perhaps if they can get back on track. There was also a good write up by Edmund Shing here on Stockopedia earlier in the year if you want to read more about it.
Now if that is not down market enough for you then you could always slip down the high street and treat yourself to some cheap shoes from Shoe Zone (SHOE). This is another cheap retailer that came to the market not that long ago and has also had a profits warning and price collapse more recently. In their case rather than blaming the election they trotted out ye olde weather excuse and apparently the wrong type of ladies boots (ankle) being favoured, although with less imitation leather I thought they would have been higher margin than knee boots?
So on the chart it is a similar picture to SCS with a gap this time at just under 260p versus the current 170p or so price. At this price it trades on maybe just under 10x with a forecast yield of 5.5% or so. I say maybe because it is an October year end and we have just had a poor August, weather wise in the UK, so I guess they could be vulnerable to another profits warning perhaps on the back of that as they blamed the weather for the last one. So on that basis as I'm not that keen on their stores or their shoes I'm not sure I can get that excited about the share either, despite the apparent value. But again their was a more bullish write up on this one on Stockopedia recently if you wanted to get more detail on it.
Finally if Sofa's and shoes are not your cup of tea then everyone's got to eat and drink right? So despite this the food retailers have been going through the wringer in recent years as competition from the German discounters Aldi and Lidl has "Mullered" them. Thus the only part of the sector which has been growing has been their high street or convenience type shops which, apart from Morrisons who were too late to the party, have been a reasonable success for the majors.
Now the main casualties of this dual pronged expansion of smaller store by the Germans and the major UK food retailers has probably been your typical high street / corner shop / convenience store which doesn't have the range or the buying power to compete. However there is one chain of these that has been expanding by buying up failing community Newsagent shops (CTN's). This one is McColls (MCLS), another recently listed retail group with a share price chart that has, perhaps unsurprisingly, been heading in the wrong direction too.
So there is a bit of a pattern emerging here, recent new issues not having done so well, which is one reason why I don't generally participate in new issues unless they are being priced to go. This is because they are usually coming to the market because the owner / managers think it is a good time to sell. This one has therefore, without a profits warning as far as I can tell, drifted down to about 10x with a 6.5% yield which may be about right / fairly full for the limited growth that is now being forecast.
Of the three I can just about see the case for this one where they are buying up small failing stores and improving them by rebranding and offering more in the way of groceries and alcohol. They also seem to be favouring neighbourhood or community stores as far as I can tell which I guess benefit from the localised monopoly and laziness or inability of their clientele to go to a supermarket perhaps 5 minutes down the road maybe? Again if you want to read about it in more detail there was a good article in the Midas column in the Daily Mail recently.
*Beware they may be cheap for a reason and because of that I cannot recommend a purchase, but as I always say you pay your money and take your choice. Talking of which on a related matter see this classic video below and read all about it if you are too young to know the story or are not familiar with it.
Firstly, yesterday during the day we had a trading update from Character Group (CCT) the £100m Aim listed toy, game and gift group which has been one of the big winners so far in the portfolio since it was launched in April this year. New readers can read about the rationale behind the portfolio in this post. The update from Character was the reassuring in line type and confirmed their intention to continue with share buy backs as and when they see that as being appropriate.
Given the rise in the share price of around 45% since it was purchased the yield has now come down to around 2%, even on next years forecast dividend, which is at the lower end of what I like to see personally from my investments. Despite this though it still scores 98 and does only trade on around a 12x PE which seems cheap but may be appropriate for such a fickle and volatile industry.
Since it was just an in line update the shares saw some profit taking yesterday, which is understandable given the price looks quite extended (see chart below) in the context of the recent weak market. Thus it is a less obvious bargain now and future price trends are likely to be more influenced by their next update in December which should give a feel for their important Christmas trading period, but for now probably nothing to get excited about but it might be worth watching to see if it drifts off significantly ahead of the next update which could then perhaps provide some more excitement.
Meanwhile today we had a set of interims from Alliance Pharma (APH) the £150m Market Cap. Aim listed pharmaceutical Company. This included another trading is in line with management forecasts and we expect full year results to be in line with market expectations type of statement. This is reassuring , however the results seemed a bit underwhelming again as the revenue growth in the half seems to have been driven by the recent acquisition although this is something they do fairly regularly. This did however fail to translate into earnings as these were broadly flat at 1.65p v 1.68p last year. May be this should not be such a surprise though as this one has failed to grow its earnings at all since 2010.
Despite this they continue to raise the dividend as they run down a high level of cover and the interim was raised by 10% which compares with 12.5% growth forecast for the full year and the 10% they did on both dividends last year so 10% and 1.1p looks like the most likely outcome to me. At a price of 56p, down 3% this morning, this leaves the shares on a fullish looking 17x their flat earnings this year with a yield of just under 2% based on my 1.1p forecast which as I mentioned earlier is the low end of what I like to see personally. It is though just over 3x covered which is good but there is only so long this can go on if they continue to fail to grow their earnings.
On that basis I can't get excited about this one up here even though they say they have more debt capacity left for more acquisitions which it seems they need to just stand still. Thus I'm glad I took profits on my own holding and it looks like it might exit the CIS portfolio at the next quarterly review at the end of this month as it only scores 77 now, after rising by a surprising 50%+ since it was purchased.
So there you go there are my thoughts on these two and if you have them I'll leave you to decide if you want to throw the toys out of your portfolio and if the drugs don't work for you?
Interim results that is from Maintel (MAI) the small £65m Aim listed telecommunications company which currently Scores 90 on the Compound Income Scores and is in the Mechanical Scores Portfolio. Similar to other smaller telecoms companies like Alternative Networks (AN.) and Adept Telecom (ADT) this one has grown by doing add on acquisitions. This period was no different as they saw the benefits of last years acquisition of a firm called Proximity enhancing their results as expected.
Underlying profits were flat but earnings were up by 8%. However, this includes various cost associated with acquisitions and when they adjust for these their reported adjusted numbers show earnings up by 30% with the dividend being raised by 38% as they bring the pay out ratio up towards 50% of adjusted earnings. This was achieved on Sales up by 20% and with increased gross margins of 38.3%.
The CEO sounded pretty bullish on the back of this when he said: "After another successful period, we have never been better placed; with a broader range of services and skills we have the ability to manage highly technical transformation projects for customers. Our new sales pipeline continues to grow and being appointed as an approved supplier on the new public sector network services framework agreement offers us the opportunity to tender for business not previously available to us".
The shares have been somewhat becalmed as you can see in the chart at the end of this piece, but I guess the news flow could act as a catalyst for a re-rating as they look good value compared to other similar companies like those mentioned above (Stockopedia Subscribers see here for a comparison). If you are not a subscriber to Stockopedia see free trial details.
They currently stand at about 670p +11% today and trade on around 10x with a 4.5 to 5% yield which seems like good value to me given the growth and the bullish outlook. However be aware that it is not terribly liquid stock as it only has about 37% free float and the spread is fairly horrendous at around 6% - 630 - 670p. Finally looking at the chart and technical picture it has been stuck in a 600 - 700p range so resistance and all time highs not far away, although proximity to 12 months high can be bullish for momentum. So if it can break out of that range that might suggest it could move up into the 700 - 800p range - the top of which would still only leave it on a more reasonable looking 13x with a 3.7% yield.
...go back into the market, FTSE 6200 starts acting as resistance and technical analysts are suggesting "A few ballsy traders will go short at 6,230 with an extremely tight stop. It’s a potential 600 point trade with very little risk." In addition to that we had a worrying story from the Investment Association on Thursday. This report on it from Reuters suggested that British retail investors poured more than 2 billion pounds into equity funds in July 2015, the highest since wait for it April 2000.
So what you might think? Historically when the small investor has gone charging into equities in a big way, the timing has often been well - poor to say the least. This comes after a six year bull market when the market has been showing signs of topping out before its correction in August. While the April 2000 record came just after the dot com peak at the end of 1999 and early in the year 2000 when FTSE last hit 7000 - a level it has only just surpassed briefly earlier this year some 15 years later!
...from EMIS Group the healthcare software provider today. This came in their half year results today which saw revenues, operating profits and earnings all up by between 16 &18%. On the back of this they increased their interim dividend by 15% to 10.6p which compares to full year forecast dividend growth of just over 10% to 20.3p. Given that they have historically paid two equal dividends each year they seem to be signalling their confidence in this growth continuing and therefore a full year dividend of 21.2p. At this morning's unchanged price of around 936p this would put it on a yield of 2.26%.
One aspect of this type of software company that I like is the amount of recurring revenue that they generate and in these results this proportion increased to more than 77%. Otherwise the fact that they have large market shares in GP and Primary Care areas and are benefiting from the trend towards the NHS using technology to save money and increase efficiencies is also attractive. They have also seen the expected earnings enhancement from last year acquisitions and they completed another one this July which is also expected to be immediately earnings enhancing too.
Strong cash flow saw them end the half year with £1.3m in cash but the July acquisition for £3m will help to utilize this and some of the likely cash generation in the second half, thus the balance sheet seems fine which also helps to underpin the dividend.
Summary & Conclusion
A decent set of numbers from EMIS Group, as expected, given their prior pre-close update. Since the company suggest they continue to trade in line with their expectation is seem unlikely, apart from the dividend, that we'll see that much in the way of earnings upgrades. Thus it remains a quality stock on a fairly full rating as it trades on around a 20x with the 2.26% yield indicated above on the back of mid teens expected growth for this year. Given it has out performed strongly in the recent market correction by rising back towards it highs it seem that there may not be that much to go for in the short term. Beyond that though, if it can break resistance from its old highs around current levels and move back down to a 2% prospective yield again, then it could perhaps achieve 1050p or so.
For a good overview of the results and the groups activities see also an interview with the CEO Chris Spencer.