Small Cap Value Report (20 Oct 2015) - IGR, GBG, SRT

20th Oct '15 by Paul Scott

20 comments 18819 reads

Good morning!

Software Radio Technology (LON:SRT)

Advance notice that I am, tomorrow (Weds 21 Oct 2015) doing my next CEO interview, with Simon Tucker of SRT. I'll be asking the one obvious question - when are sales finally going to take off? If you have any other pertinent questions, then please leave a comment below this article, and I will try to include that in the questions i put to him tomorrow.

International Greetings (LON:IGR)

Share price: 134.75p (up 0.6% today)
No. shares: 58.8m
Market cap: £79.2m

(at the time of writing, I hold a long position in this share)

Trading update - this company describes itself as, "one of the world's leading designers, innovators and manufacturers of gift packaging and greetings, social expression giftware, stationery and creative play products".

Checking back through the archive here, to refresh my memory, I last wrote positively about this company on 26 Aug 2015 here, summarising the main points. The company issued an in line with expectations update then, and there's another one today.

The update today covers H1, i.e. the six months to 30 Sep 2015, and gives a number of upbeat-sounding bullet points. The key one says;

The Board is pleased to confirm trading for the six month period to 30 September 2015 is in line with expectations.

On the full year outlook, the company says;

Sales revenue in the year to date, together with a solid order book underpins our expectations for full year revenue.

Net debt is also flagged (important, as this has been an issue in the past);

Our seasonal working capital build in the run up to Christmas has recurred in line with expectations. However, we anticipate reporting H1 net debt significantly lower than at the same period last year.

Valuation - despite the shares having had a good run, it still looks quite good value, and note that the StockRank is 99.

My opinion - there seems to be a decent turnaround underway at this company. Gervais Williams rates management here too - he was enthusiastic about this company a few months ago at Mello Peterborough.

The balance sheet has been inefficient in the past - with high inventories, funded with too much debt, but that seems to be improving.

All in all, I like it. If the turnaround continues, then I wouldn't be surprised…

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imranawan

20th Oct '15

Hi Paul

Thanks for the International Greetings (LON:IGR) write-up and I picked up a little stock off the back of the positive TU, coupled with the fact it has a high stock rank. I also liked the high FCF per share and this has improved over the last two years.

If time permits would you mind looking at Quantum Pharma (LON:QP.) who issued interims this morning. I don't hold, but it looked potentially interesting. In terms of valuing the company, this is tricky given they've capitalised a lot of development spend. I'd welcome your thoughts.

Best wishes,
Imran.

DLG12

Hi Paul great write ups as usual. Just wondering if you had time to consider Quantum Pharmaceuticals? Cheers.

Roger Lawson

I think the big difference Paul in terms of valuations of GBG and Boohoo is that the latter sells clothes (a fashion item), and the former sells business services where there is a lot of repeat revenue. There are other differences also re length of time listed, history of meeting expectations, quality of management perhaps, etc. I do hold both but I would certainly want Boohoo to be cheaper.

Paul Scott

Hi Roger,

Fair points, and that's the conventional view.

However, my view of cheap fashion is rather different. Companies like BooHoo, New Look, Primark, etc, actually have something very, very close to recurring revenues. Their customers will return, regular as clockwork, with the intention of spending £x on items that they like. So what these cheaper fashion companies do, is ram in many styles, and the popular ones sell. The retailer then repeats the most popular ones, and the whole thing repeats forever.

In my days as an FD in the low-priced fashion sector, revenues were highly predictable - I could estimate within typically about +/-2% every week what the revenues would be, for many months in advance. There would be a short period at the start of each season, where none of us knew how well received the new range would be, but once the trend was established, then the rest of the season became amazingly easy to predict, in terms of sales and margins.

Therefore, as long as your buyers don't do anything too stupid, and you get the product broadly right, and at the right price, then a low priced fashion retailer's revenues are very close to being as predictable as if they had been contracted in advance.

I draw a distinction between the low end market, where the retailers are really fashion followers - it's all about piling it high & selling it cheap, with fairly safe fashions. So the fashion risk is low. That's very different from high-priced fashion, where the customer wants a product which makes them a fashion leader (or looking like an idiot, if that particular fashion flops).

Online retailing is even better. Boohoo.Com (LON:BOO) use a "test & repeat" model, where they just order a small quantity of hundreds of different products. They're put on the website, and within about 24 hours the company knows which products to re-order in much greater size. The beauty of that is, rather than having to send thousands of each particular product to hundreds of shops, you can instead trial the range from one single warehouse, and then repeat order it almost immediately. Combine that with a fast supply chain, and you have an amazingly responsive business model.

Regards, Paul.

cholertonandrew

Hi Paul,

With srt it would be helpful if he could provide any estimates of future recurring revenues (or at least pricing) from their software platforms- the Geovs display platform and the Apollo software that they're developing for vessel owners. It would also be good to know the pricing of their Absea technology for tracking vessels further out.

I also think you asked for thoughts on intercede awhile ago. I've copied a link to an interview that their chairman gave- it's very insightful I thought. it's a stock I like a lot although I think it's hard to value.

Regards
Andrew

http://www.directorstalk.com/the-chairman-chief-executive-of-aim-listed-intercede-richard-parris-says/

handy

Hi Paul
I think you are already aware of most of these comments/questions. ST needs to be pressed on the questions of competition, reduction of inventory and security of supply

1 Management is consistently over-optimistic.
2 Is the company underestimating the competition? I am aware of Weatherdock, Alltek, Drew Marine (Acrartex, Ocean Signal), Orolia (McMurdo) and Digtal Yacht. A £200m validated pipeline is only worthwhile if they get the orders. .
3 As a result of optimism on the timing of US coast guard requirements, they hold 12 months stock of finished goods. The US regulations now mandate the fitting of AIS to larger vessels by 1 March 2016 so there is a reasonable chance, subject to competition, that inventories will come down and cash go up.
4 I am uneasy about their reliance for transceiver supply on being a minor customer of the Hungarian subsidiary of a large US company.
5 The company currently has about 50% of its business as a base load with the balance coming in large individual, intermittent contracts. Should investors accept ups and downs or is the company taking steps to generate a more even flow of business?

6 Where is the back up if something happens to ST?

aflash

Hi Paul, re SRT

Please ask him about the history of their software developers and how they came to start up in the South West. The reason for this is it will give me an idea of the possible adoption of their technology by governments.

As far as I understand all the founding staff and contractors are naval engineers from the admiralty facility in Bath. (This is a large centre, although far from the sea, which was established in the Second World War to get away from air raids.)

The engineers like the area, so I expect him to say recruitment of quality people is easy. Their contacts may lead to Admiralty contracts and Naval take up of the technology.

SRT In reply to aflash, recruitment is not easy and they are considering opening another development office in an area where more software people are available.There is already the very small team in Cardiff as a result of the acquisition of their visual display division, but this doesn't seem to be an easy area for recruitment either. Is there a danger of having lots of little teams who are difficult to manage? I wonder if Digital Yacht (see my post 6 above) is also a Bath spin-off?

Brackendale

That explanation of Boo Hoo model is eye-opening, thank you. Is the flipside that its easy for competitors to do the same (low cost experimentation, appear to offer range, concentrate on a few best sellers, etc)?

alterego

Handy, you might be interested to learn that Digital Yacht are a customer of SRT. Although they may compete on some other products, their Class A device is made by SRT.

This is the DY version
http://www.digitalyachtamerica.com/index.php/en/products/ais-systems/ais-transponders/product/73-cla1000-class-a-transponder
and this is the SRT one from SRT's web site
http://www.srt-marine.com/products/oem/poseidon-class-a-ais-transceiver/

I think Ocean Signal are not really in competition as their range of products is mainly targeted at rescue not AIS. Acrartex also do not appear to be in competition and like DY, their Class A device is made by SRT
https://www.acrartex.com/products/catalog/automatic-identification-systems-ais/aislink-ca1/#sthash.aCOSoJI5.dpbs

Weatherdock, Alltek and McMurdo do compete for sale of individual devices but so far as I can see are not bidding for major contracts to supply complete systems to governments.

Wol

Questions for SRT:
* why were previous sales forecasts / expectations not realised?
* why will it be different this time?
* if the next year pans out as previous years (instead of as hoped) what would that mean for revenue and profitability? i.e. What is the worst case scenario?
From what I've seen of him so far he's a lovely guy and he's really putting his heart and soul into building this business. I absolutely wish him well. But it would take something very different to tempt me back in after previous let-downs.
Thanks for hosting these interviews. They are fascinating and infomrative listening.
Julian

ericb

SRT -
Can Simon categorically state that he will not be looking for further financing, and give an explanation on how he is going to achieve that.
and: What are his views on open offers for existing shareholders?

Rockman

Hi Paul

Any chance on a quick update about Spaceandpeople (SAL)? The share price seems to have dropped by over10% in recent days.

Hi Brackendale,

Re Boohoo.Com (LON:BOO) you asked;

Is the flipside that its easy for competitors to do the same (low cost experimentation, appear to offer range, concentrate on a few best sellers, etc)?

The conclusion I've come to, is that it's fairly easy to set up an online fashion business - pretty much anyone can do so, with a small warehouse, and spend as little as a few thousand pounds on a website (you can start with off the shelf software), and buy a bit of stock.

However, what people have discovered, is that whilst the barriers to entry are small, the barriers to scale are massive. The main impediment is marketing spend. BooHoo spends about 13% of turnover on marketing - an absolutely massive amount.

Therefore, especially in the early days, the only way to scale up, is to run at a massive loss, as your marketing campaigns absorb multiple-millions. If you don't spend on marketing, then customers just ebb away to competitors. Especially as there are so many competing websites now.

Remember also that there are dozens of large bricks & mortar fashion retailers that already have transactional websites, and have done so for quite a few years. So new entrants to online fashion retailing are joining a very crowded sector.

I see BOO as one of only a handful of long-term winners in this area. That's why it's exciting to me. It's also all about sourcing - BOO are experienced rag-traders who already were major suppliers (for many years) to High Street chains. They can get the right styles in, at prices that new entrants just won't be able to match. So they make higher margins, which can be recycled into more & more marketing spend, creating a virtuous cycle.

Regards, Paul.

Hi Rockman,

There's nothing to update on for Spaceandpeople (LON:SAL). There have not been any announcements from the company - which is what I comment on in these articles - results & trading updates.

I don't usually comment on price movements where there isn't any news. That's just market sentiment moving the price about, i.e. normal market activity.

Regards, Paul.

martinthebrave

A bit off topic but I know that some of you hold shares in Somero. I have just received a Dividend and it was basically about two thirds of the 1.9 cents due. Am I correct in thinking that I have to fill out a W8 BEN residency form iirc which I think reduces the amount of US withholding tax on any dividends?

cig

Re 4, contract electronics manufacturing is a commodity business, moving to a new contractor if their current one ceases to be satisfactory should not cause major problems (and even less so if they have large inventory).

Rusty2

Yes without the W8 form they will deduct 30% tax, with form I think its 15%?

underscored

Unless you hold in a pension wrapper, then it is 0%.

acdoug

Good evening Paul. re SRT
Your question about sales cuts to the nub of it, but developing on it, in the last annual accounts they announced:
"The USCG mandate announced on 30 January 2015 gives affected vessel operators until April 2016 to comply and thus, although we have received some initial orders relating to this market opportunity, the majority of business is expected to come in the current financial year due to the legal fit window and thus expected market buying pattern."
Tucker is now reporting that sales are H2 weighted but how does the current ORDER position/expectations stand vis a vis this, and what is the latest position on the (deferment of) the various mandates?

Small Cap Value Report (20 Oct 2015) - IGR, GBG, SRT

Software Radio Technology (LON:SRT)

International Greetings (LON:IGR)

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Paul Scott

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