Small Cap Report (9 Apr) - LOQ, GTC, DRV, NPT, NRR

9th Apr '13 by Paul Scott

12 comments 17806 reads

Pre 8 a.m. comments

Another contract win for a widely-followed company, Lo-Q (LON:LOQ) has been announced today, this time for a theme park in Turkey. No financial details are given, but it's a 2-year contract, with an option to extend for another two years, to provide the Q-bot virtual queuing system for eight of the park's largest rides.

The shares recently peaked at a pretty bonkers price of around 670p (which was a forward PER of about 40!), but have since come off to a perhaps more reasonable 537p. The forward PER of 32 doesn't tempt me I'm afraid, still much too warm for my tastes. Although as supporters point out, each contract won is a stream of recurring revenues, so earnings will lag behind the valuation, which is an argument that has some merit to it.

EPS will surely need to come in a long way ahead of broker consensus of 16.2p and 17.6p this year and next year, to justify the current rating? I can get to a price of about 400p at a stretch, but a more reasonable price looks to me around 300p based on existing forecasts. But if you think they will out-perform forecasts, then it's worth more! You pays your money, and all that.

They should start paying dividends now too, in my opinion. I notice that the Beneish M-Score throws up a warning flag over possible "earnings management". Don't shoot the messenger, I'm just pointing it out as an area that investors might want to look at, and gain reassurance about.

I like the look of results from Getech (LON:GTC). This is a specialist consultancy in the resources sector, which owns a database of global garavity and magnetic information, which is licensed to oil exploration companies.

At 65p the market cap is £19m.

Interim results to 31 Jan 2013 show a very successful half year, with turnover of £4m delivering a profit before tax of £1.4m (up a whopping 290% on the equivalent prior year period), although the increase against last year's H2 is less pronounced.

Diluted EPS is 3.328p, so if we double that (assuming no seasonality from H1 to H2) then it's about 6.7p annualised, so a PER just under 10. Looks pretty…

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Edward Croft

9th Apr '13

Paul - I've been reading Robert Haugen's most excellent little book "The New Finance" in which he expounds on the fact that most growth estimates are far too optimistic. Mean reversion is a very powerful force - any competitor looking at LOQ right now must be thinking - wow those ROCE /ROE numbers / growth figures are great - there's money here. The world turns and shifts its resources to compete with the successful. Will LOQ still have such great numbers in a few years? Does it have a sustainable competitive advantage? Does it have an economic moat?

LOQ was David Stredder's standout pick in 2009 - it's made shareholders a tonne of money since then. I agree with you that the valuation looks to have priced perfection in - at these levels you'd have to have great conviction as a buyer - I can't see a margin of safety at this price.

Paul Scott

Hi Ed,

Interesting thoughts.

Another point is that the markets assume growth to be steady & predictable, whereas in my experience for smaller companies, it more often tends to be quite erratic - i.e. rather than steady 20% profits growth p.a., you get a zig-zag upwards, with profits suddenly shooting up say 60% one year, then maybe 10% the next year. So I like to find good companies that have disappointed in the short term, but will out-perform in the long term (easier said than done!)

That's especially the case with operationally geared companies such as software companies, where the product is very high gross margin, but the overheads are fixed. Most overheads are salaries in that type of company, and it's difficult to adjust those in the short term. So management tend to have to estimate what their likely sales will be, put in place a fixed overhead to achieve that, but then can be wrong-footed towards the end of the year if a few sales contracts are not closed in time. Clever customers can also delay deals until year end, and squeeze out a big discount as they know the vendor is desperate to meet year-end figures.

The good thing with Lo-Q is that their revenues are recurring, although the bad thing is that they are volume dependent, and hence bad weather over the short summer trading period when most water parks operate, can whack their numbers hard.

I can see the niche for Lo-Q in water parks, and they seem to be executing in that niche very well. But I'm less convinced that Lo-Q have much of a moat in other areas, where a smartphone App can be provided by anyone. As you say, if you become very successful in a niche, that draws in competition eventually.

Also, I don't buy LOQ's CEO's claim that queues are everywhere. In reality, long queues that need a virtual queuing system are only needed in a very few places, such as theme parks, or Benefits offices (who use a paper-based system perfectly happily). So I don't believe that any smartphone system will be used at rail stations, or post offices, or anywhere else for that matter, Theme Parks are very much a unique case as they are closed environments. I think that's just hype. Same with Doctors surgeries, etc - they want you physically there, not milling around outside when the Doctor is ready to see you!

That said, if LOQ carry on picking up more theme park contracts, then earnings should gradually grow into the valuation. But I cannot see 100% upside with a 1-2 year view on the share price from here in a reasonable scenario, which is usually my key criteria for investing. Although obviously the shares have done amazingly well historically - but that means nothing. It's all about what the price does from today that should drive whether to buy more, hold, or sell.

The bulls are VERY bullish on it though, and are smart people who have done their research! But I cannot help thinking there is also a fair bit of euphoria in there too at the moment. Happy to be proved wrong though!

Cheers, Paul.

shanklin100

Hi Paul

So you disagree with LOQ's stance that their patents provide strong protection from competitors?

Have you any evidence to support this suggestion?

Cheers, Martin

Hi Martin,

Patents usually just protect a certain method of doing something, but very rarely a whole concept.
Plus they are very expensive & difficult to protect.

So I would not personally place any reliance on the assertion that LOQ can block anyone else from developing a smartphone App to do virtual queuing.

Cheers, Paul.

Hi Paul

It will be interesting to see how this plays out. Currently, LOQ appears to have no competition wrt its queuing products and is winning new business at a reasonable rate.

Like many I see the market forecasts as far too low albeit the company's profitability is sometimes adversely affected by the costs associated with the first year of newly won business.

I am sure I read somewhere a statement by Tom Burnett, the LOQ CEO, that if Walt Disney adopted LOQ products they (WD) would make an extra $250M - $300M per annum, which does suggest to me that LOQ is massively under-valued by the market. As and when I find this quote I will post details here.

Best wishes, Martin

Fair point re. Disney but is there evidence that Disney may do so?

CantEatValue

At the last meeting I saw LOQ present Tom explicitly stated he thought they had zero chance of ever getting any business from Disney as they like to do everything in house.

I do think that LOQ have strong switching costs for their existing theme park contracts and that business looks fairly wrapped up to me but like Paul I don't really buy the other queuing ideas so much (but could well be proved wrong) and the current price basically assumes everything goes too well for my liking.

10th Apr '13

I agree its unlikely that LOQ will ever pick up any business from Disney but just wanted to highlight:
- the huge potential market LOQ have to sell into and
- the fact that no significant competition has materialised

What I get rather frustrated about is the way that every positive RNS from LOQ is being used to justify giving it a good kicking here, whereas weak RNSes from companies such as Vianet are used to justify the suggestion that they become long-term holds.

WHI Ireland have upped the EPS forecasts for GTC from 4.22p to 4.59p for the current year and from 4.66p 4.95p for next year.

Hi Shanklin,

I'm not kicking LOQ at all, and if you check back at my comments I think they've been pretty balanced, mentioning positive RNSs, and often saying what a good company it is, etc.

What I have repeatedly questioned is the VALUATION, because based on existing forecasts it looks far too high to me. And even then I've pointed out that if the bulls are right, and results exceed forecasts, then that would justify the valuation.

Companies on very high ratings are priced to perfection, and hence should attract closer scrutiny. Whereas companies (like Vianet, which you mentioned) on bombed out valuations due to under-performance, can become more attractive as they fall, because the dividend yield increases to a very attractive level.

As you can see from my Equity Active report on the VNET profits warning, I didn't pull any punches at all & was highly critical of management!

I appreciate though when you're long of a stock, it's not pleasant to listen to an opposing point of view, but there are many times in the past where I wished I had, as the exuberance of a hugely profitable investment can very easily make one see things through rose tinted spectacles.

Cheers, Paul.

carmensfella

11th Apr '13

For any Stockopedia members tuning into LOQ for the first time I have been a very long term holder and probably well placed to explain where the likely significant growth over the next couple of years is going to come from when compared to the year just ended.

Firstly there is the fact that 2012 was not a good year for weather helping the company....Last year Lo-Q’s revenue was up 18% despite a very wet UK and a very hot US holiday season. Like-for-like sales were up 12.6%. Imagine if the weather had been more supportive to higher attendances at the parks.

Secondly the company signed a partnership with Sanderson in the Far East that should be delivering some new contracts in that region quite soon and certainly during 2013.

Thirdly the accesso deal looks to be a masterstroke not just for the two businesses being stronger as one but also due to the cross selling potential and great management team that has been acquired. They will help accesso deliver growth to LOQ in revenues and earnings in 2013.

Fourthly so far in 2013 the dollar strength has worked very well in favour of LOQs 90% overseas dollar earnings. That movement so far, if it holds and certainly could be significantly hedged at this point by management if desired, would increase flat 2013 earnings by about 10% when converted.

Finally the company has stated that year two and three in new parks see very significantly increased use of the products and repeat business that means all the new parks signed up in 2011 and 2012 will deliver VERY significant growth in 2013.

I certainly look forward to 2013 and expect very good newsflow and upgrades to forecasts to be likely if the above factors play out as I expect.

David

boothbym

23rd Apr '13

Any thoughts on the bounce over the last 2 days back to £6 from £5? Quite a few £25k buys at £5.90

Small Cap Report (9 Apr) - LOQ, GTC, DRV, NPT, NRR

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Paul Scott

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