VALUE INVESTING
Forminster: A Value Microbe

By Stephen Bland (TMFPyad)
August 2, 2002

A speculative situation this, but one from which I will include myself out for two reasons. Firstly it has a very small market cap of around £6m and secondly it is a specialist retailer in the clothing business, both of which for me are a complete turn off. Forminster (LSE: FORM) trades under the ladieswear shop name of Kookai and also sells menswear to others under the brand names of Saxon Hawk and Lincroft.

Here are the usual details:

Share price - 19p
52w high/low - 28p/19p
5 year high/low - 135p/19p
Market Cap - £6m
EPS y/e 02/03/02, normalised loss - 0.6p, reported loss - 2.1p
EPS forecast y/e 28/02/03 - 2.4p
EPS forecast y/e 28/02/04 - 3.8p
Forecast 03 P/E - 7.9; 04 P/E - 5.0
Historical yield - 8.4%, on 03 forecast dividend - 9.2%
P/TBV - 0.9
Net cash - 24p per share at the last accounts
One year relative weakness - 3.2%
Directors own 12.6%, other majors 72%

In common with many small caps, there is only one broker who has produced a forecast though it is fairly recent, dating from June 2002. A marginally good point is that this forecast is not from the house broker but even so a great deal of caution must be exercised in this situation. Because of the vagaries of anything to do with the fashion industry, my view is that forecasts are even less reliable with such shares than they are normally in any case.

However supporting the forecasts, the directorspeak on the future is pretty bright for the current year. They reported on 24 May 2002 that "the spring/summer season to date has been extremely strong with like-for-like sales up 16% on stock levels 10-15% lower than last year." Like-for-like sales is an important ratio in retailer shares analysis and to rise 16% is a substantial improvement.

As is common in the rag trade, because of the risky fashion aspect to it, Forminster has a chequered history. Back in 1998 it earned 8p per share, falling to 0.2p in 2000 and then turned in losses for 2001 and 2002. Also it was running net debt rather than net cash for much of the period. The share price declined over these years from 135p and it is now at a five year low point.

Severely fluctuating fortunes are characteristic of the rag trade, rags to riches and back to rags again. Stable it ain't. The problem, not unlike the famous economic example of the hog cycle, is that you have to stock up before the relevant season with the ranges you believe will sell. The fickle public though may have other ideas on occasion so sometimes you get caught, literally with your pants down, holding a load of stock that can only be sold at knockdown prices. When it works though, it can work handsomely, but it is a notoriously unreliable industry, littered with bust companies over the years.

The shares at 19p are very slightly below book although with the spread, the offer price is probably around book, which was 20.4p at the last accounts this year. Note that I have not checked the full accounts to identify the nature of the assets and this would be an absolutely essential thing to do for anyone interested. Cash though is one of its major assets. During the year ended 2 March 2002, the company disposed of its 15% interest in Kookai SA, a French company from whom Forminster holds the UK franchise for the Kookai brand, realising £6.8m. This is the primary reason for the cash pile at the last year end. In addition the company produced net cash from trading as well, despite the accounting loss.

Quoting from recent directorspeak, the company traded from 52 outlets at the last accounting date including a "flagship" Marble Arch store. They state that this will close for two months in the Spring/Summer of 2002 for refurbishment which will affect adversely the interim results but they hope that following this a significant trading increase will result.

All the usual health warnings about small caps, and especially in this case very small caps, apply of course. But for those who are interested in the microbes of the market this could be interesting perhaps.