Wednesday, January 23, 2013


Good morning. Interesting trading statement from W H Smith (SMWH). Despite reporting LFL sales down 5% for the 20 weeks to 20 Jan 2013 (which would normally be pretty disastrous for profits), they report a "good profit performance" (although not quantified in absolute, or relative terms).

This has been achieved by tightly controlling costs, and a planned strong increase in gross margin. This is pretty impressive, I've not heard of such a big (5%) drop in LFL sales being recouped through margin improvements & cost control before.

I still can't shake off the feeling that W H Smith is an accident waiting to happen - it's as old economy as you can get - books, greetings cards, travel, etc. Yet somehow it still manages to not only survive, but to apparently prosper. Perplexing.

Wynnstay (WYN) is an agricultural products group, but reading their results (Finals to 31 Oct 2012), they also have a retail division, including 21 pet stores, so a potential roll-out story there perhaps?

They report record results, with revenue up 9% to £376m, and profit up 13% to £7.8m. Note the wafer-thin profit margin there. EPS is up 16% to 35p. That is ahead of forecast of 32.8p EPS, so looks good, but a share price of 468p means the PER is 13.4, not exactly a bargain.

The divi yield of 1.8% is unexciting too (total of 8.5p for the year). It has debt  of £13.8m (compared with a £79m mkt cap), so all in all this looks fully priced to me, so not of any interest.

£10m mkt cap computer games company Zattikka (ZATT) has disappointed in its short history as a Listed company, with the shares halving after a profits warning in Nov 2012. Their trading statement today indicates that things are not getting any worse, with trading in line with the expectations set out in Nov. I generally avoid this sector, after several bad experiences in the past. These companies constantly have to run to stand still, with frequent profits warnings if new releases (which have an extremely short shelf life, but up-front costs) flop, as inevitably they will from time to time.

However, the holy grail of gaming these days is to come up with something addictive online, where silly people pay money for imaginary objects through platforms such as Facebook, and waste vast amounts of time playing games.

Last week a new friend told me that Severfield-Rowen (SFR) looked like a good short, and I'll know to listen to him more carefully in future, as SFR has served up a nasty-sounding profits warning this morning.

It's a structural steel maker, for buildings, etc. Cost over-runs on a project at 122 Leadenhall have triggered today's warning, and worryingly they don't seem to be on top of the figures either - with a review needed of its contract base. Clearly poor management, and the CEO has been kicked out.

Its funding position is also wobbly, discussions with Banks taking place over Covenants. This is the nightmare scenario, and is the reason now why I rarely touch any company with significant debt, relative to cashflows. "Gear today, gone tomorrow", as a wise man once told me (wish I'd listened more carefully!)

SFR shares are likely to be pole-axed today - halved maybe? I'm deploying my bargepole, and am not tempted to catch any falling knife where there's a risk of insolvency - been caught out too many times before.

4imprint (FOUR) puts out a "broadly in line" trading statement, so in other words slightly below. I do wish companies would stop using this trick, and just say "slightly below". It's a bit like charging £9.99 or £10 for an item. £10 is far more honest, and customers respect honesty. Although it's one of those situations where the first company to break ranks on this will probably regret it, as the market will probably over-react. But does it really matter what the short term share price is anyway? These things correct over time.

I like FOUR, it seems a steady growth company, but the price is now up with events in my opinion. Nice divi yield of over 4%, and a solid balance sheet with net cash, so it's my type of company, just not quite cheap enough for me to be a buyer now.

Finsbury Food (FIF) puts out a solid trading statement, although despite gradual reduction, there is still far too much debt for it to be of interest to me. I rarely (if ever) invest in food companies, as nearly all the profit is screwed out of them by the power of the big supermarkets.

32Red (TTR) is an online casino which has caught my eye in the past due to its very effective marketing strategy, and strong growth. Their trading update today shows continued growth with revenues up 28% for 2012. Profits are in line, so that puts them on a PER of just over 11, and a divi yield of 3.2%. Not bad for a growth company, although I don't like this sector, both for financial and ethical reasons.

Findel (FDL) issues an upbeat sounding trading statement. I don't like this one - accident-prone, and still has way too much debt. Low margins, and dreary, old-fashioned businesses. The valuation seems to already price in a trading recovery, so it doesn't interest me at all. There's no dividend either, so it ticks pretty much every box on my bargepole list.

Just to alert you in advance, my reports will probably be moving to another site as from Monday. However, they will still be published at the same time, with the same content, and will remain free. So just keep coming here as usual, and instead of the main report being here, there will be a post listing the companies covered, and a link to click on to read the report on another free website.

Why am I doing this? Because they're paying me, simple as that! We all need to earn an income, and I think it makes sense to monetise what I'm doing this way, rather than introducing a subscription model.

Please rest assured that I retain full control over what I write, and there really is no catch. They are experts in advertising, and generate revenue from ads, which they use to split between themselves & the writers of articles.
You won't even have to register to read the articles, and you will also still be able to leave comments. So no downside at all, just a bit of income for me, which is nice.

Have a good day.

Regards, Paul.

(Paul does NOT hold shares in any companies mentioned today)


  1. Hi Paul,

    Think one thing in SMWH's favour which is sometimes overlooked is that it seems to have a branch at just about every large or medium size train station in the land; and train stations are places where people often have to hang around with time to kill. Going into the WH Smith to browse the books and magazines seems like almost the natural thing to do whilst waiting for the train.

    I wouldn't buy shares in SMWH because I can't see much if any room for growth but I do think the above might explain why they are surviving when so many other 'old economy' retailers are struggling.

    All the best,


    1. Good point Steve.

      Although as more people have tablets & smartphones, surely even the railway station market is set for gradual decline for SMWH? At some point this will make a great short - because gross margin improvements can't usually be repeated. So declining sales will inevitably hit the bottom line over time.


    2. Don't think that "going into the WH Smith to browse" will be contributing much to profits!

      I'm not a great shopper so the fact that the WHSmith shops look to be over-stocked tatty places is probably irrelevant.

      However I was amazed recently when I needed to buy a present before Christmas. Went in, found a small hardback book, price printed by publisher, £11.99. Sticker price, £9.50. Decided to buy it. So at that stage I'd viewed the shop keepers goods, decided the price was okay and decided to buy. Went to till to be told, "oh that's now £7.50"! So that's £2 straight from their bottom line. V. poor on their part.

    3. You need to look at their two distinct divisions: High Street and Travel. And travel is where they have a good position imv: even if you can use smartphones & tablets & ebooks, if you are going to buy ANYTHING (other than hot food) from a rail station, an airport (esp. flight side), a motorway service station, and soon a hospital, you are very likely going to buy it from WH Smith.

      Also, bear in mind their share buybacks. For other companies, it might not be the best allocation of capital, but for an "old economy", perhaps share buybacks are the best thing to do with the cash, increasing eps in the process.

  2. Hi Paul
    Delighted you'll be getting some rewards for your excellent posts. Hope it all goes well. And delighted too that you'll continue to give the rest of us the benefits of your experience and insights free.

    1. Thank you Jane, much appreciated!

      I'll keep the Blog here live, so if for any reason the new arrangement doesn't work, then we'll just revert to having the reports here.

      Regards, Paul.

  3. Paul

    I'll echo the positive comments above too.

    Will you keep up the labelling by ticker of each blog post even if the post is just a link to the other site?



    1. Ian,

      Yup I'll do that, no problems. Good idea, thanks for flagging it up. Also that will help keep the archive live, as companies reported on the other site will come up on a search done here.

      Cheers, Paul.

  4. This has been such a helpful site, and Paul's analyses are so much more rewarding (and definitely worth a sub) to small investors than watching CNBC's "experts" or reading the business press.

    1. Thanks Lewis!

      I'm trying my best to avoid charging any subs.
      So my reports are planned to be free for the foreseeable future!

      Cheers, Paul.

  5. Hi Paul, I'm really appreciating your comments, they are very informative and interesting. I'm currently getting back into the sector after a reasonably long break and although I really miss not meeting the companies I'm enjoying using the huge amount of information now online. I'm hoping to start investing again shortly (once I think I've got a grasp on what's going on again..!) and it is so refreshing to have someone commenting on this end of the market who isn't tied by being a broker to a stock and has an open hand. So pleased you will now be paid for it too, well deserved. Thanks for helping me back to small cap!
    Lou Investing

  6. Dear Paul, I have just started re-investing by following your insights and analyses. I remember following your posts on the fool from a decade ago, but never did anything about it then. I really just want to say thank you so much for sticking around and pointing the way to prosperity. Paul T

  7. Hi Paul,

    I've been enjoying your blog and I'm glad to hear that you'll be getting a bit of dosh out of it. You used to post fairly often at 3 or 4 in the morning so I'm impressed that you're managing to get up early and read and digest announcements. Also impressed that you're running a half marathon: I've been doing a mile a day for the past 4 months in order to remind myself what a shit idea it was to start smoking 30 years ago, and that's still all I can manage.

    I popped in to the Oxford branch of WH Smith yesterday at about 11am and apart from the staff and one person browsing the periodicals I was the only customer. The store was cramped and rather shabby.

  8. Thanks for all the kind & supportive comments above, much appreciated! :-)

    Regards, Paul.