Small Cap Value Report (26 Apr 2016) - BOO

26th Apr '16 by Paul Scott

35 comments 20699 reads

Good morning!

Sprue Aegis (SPRP) Meeting

Meet the management of Sprue Aegis (LON:SPRP) tomorrow (27 April 2016).

ShareSoc has arranged a meeting, as follows (click on the "Contact" link below to book yourself a place):

Sprue Aegis Business Review. The directors of Sprue Aegis have agreed to answer ShareSoc Members questions following the recent trading statement (profit warning) and after the results announcement on the previous day. This event will commence at 6.00 pm and last approximately one hour. It will be at the office of Tavistock Communications at: 131 Finsbury Pavement, London, EC2A 1NT. If you plan to attend please tell us by using the ShareSoc Contact page here: Contact - mention “Sprue Aegis Meeting” in the Comments box.

This seems an excellent idea. Well done to ShareSoc in taking the initiative. Well done also to SPRP management for being prepared to face private investors, and answer questions, so soon after a major profit warning. I'd like to see more such meetings, and maybe webcasts too, when difficulties arise at any company.

I often complain about the lack of specific information available to private investors, especially when there are problems at a company. SPRP is a very good example of how the bad news was actually handled very well - the company published specific guidance on its revised profit expectations, and has agreed to meet private investors to answer questions. ALL COMPANIES SHOULD DO THIS. Vaguely worded profit warnings, with no figures, are just totally unacceptable, which sadly is the norm from most companies.

Boohoo.Com (LON:BOO)

Share price: 48.75p (down 2.5% today)
No. shares: 1,123.3m
Market cap: £547.6m

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

Results y/e 29 Feb 2016 - these are sparkling results, as expected. It's even more remarkable when you consider that all the growth is organic. There are not many big organic growth small-mid caps around at the moment, on the UK market. So the ones we do have, like BOO, command a considerable premium valuation, rightly so.

I've gone through the figures carefully, and skimmed some of the narrative. The numbers are more important to me than the narrative. Although I always carefully scrutinise the outlook statement, which is the most important bit of narrative to always read carefully.

The figures look terrific to me, I'm very pleased.

Some key…

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DarwenLad

26th Apr '16

No mention of a dividend at Boo, which it could easily afford. I realise that most high growth companies don't believe they should pay dividends. But I like companies that accept the discipline of paying a dividend - even a small one. Paying out real cash to shareholders helps focus the mind of the board. That said I remain a big fan of Boo. Having attended last year's AGM (I was the only shareholder) it came across as a proper company, with a sensible board of directors. I might regret saying this, but it felt like a company that had an exciting long-term future, and not just another over-hyped internet stock.

Rusty2

I see Austin Reed has gone into administration. What with BHS going, is this good or bad for the remaining retailers?

Aislabie

I am a satisfied investor in BOO, but one possible problem is the effect of a brexit vote that would inevitably crash the pound , presumably making BOO's imports much more expensive and pushing down the gross margins

kenobi

All boos competitors would have the same issue re brexit, so while it would hurt prices would just have to go up

FREng

According to the BBC, "Austin Reed was bought just last week by the distressed retail specialists Alteri Investors, who purchased the struggling firm for an undisclosed sum.

"The new owners had already loaned the company £6m last year to improve its online operations and purchase new stock.

"But on Friday the firm announced that it was intending to appoint administrators, though Austin Reed remains a going concern."

Altieri's webstite says: "18th April 2016 Alteri Investors announces the acquisition of the outstanding shareholder loan notes and the entire share capital of Gajan Holdings, the ultimate holding company of clothing retailers Austin Reed, CC and Viyella."

Why would you buy a company and then put it into administration? Is it a legitimate way to get rid of the debt but to keep hold of the assets?

Trakm8 Holdings (LON:TRAK) announced a maiden dividend, too. That shows some confidence. I wonder if it has scared the bears away.

simoan

HI DarwenLad,

I completely agree. At some point a certain amount of the cash on the balance sheet must be truly surplus to the everyday needs of the company and it should be returned to shareholders. I hold BOO and given the conflict Paul describes so well between a listed company and a family controlled private company, IMHO it is particularly important that BOO hands excess cash back by some means (special dividend, buybacks) to illustrate that they understand the money belongs to all shareholders and not just those running the company.

All the best, Si

I notice ASOS (LON:ASC) does not pay a dividend either and that is a much larger company than Boohoo.Com (LON:BOO).

ridavies

Great report on Boohoo Paul. Reading the link re Pretty Little Thing, I wonder if the sons would get on with the father so well if PLT became part of Boohoo; and whether PLT would be so complementary to Boohoo. In other words, not just a question of whether or not to absorb PLT into Boohoo.
Agree about the 25% growth for this year. Better to beat forecast than fall short. They have done this once and felt the pain. Also the 25% is against the higher comparatives of 15, whereas the 15 figures were against softer comparatives in 14.
The cash situation is a difficult one. A divi would be a useful indication of a recognition by the board of who the owners of the business are. If the board are large shareholders they benefit too. The fact that ASOS doesnt pay a divi is not relevant to me. If they can afford it and they dont have a better use for the cash, they should. There should be a ceiling to the cash cushion a business feels it needs for long term sustainability in a fast changing world. This should be stated and justified.
Always interested to hear counter comments.

I think you swore off commenting on, or investing in, blue sky companies and I also got tougher with myself about it, but Horizon Discovery (HZD) I held onto.
We only have preliminary results today and no way to dig in to the accounting for R&D etc but the top line sales (69%) up and the £25mm of cash suggests that this may yet achieve its promise.
My losses on this are getting smaller!

Effortless Cool

27th Apr '16

Must have been a good lunch ....

StandardModel

Paul

Thanks for another great review - I for one would be lost without the SCVR.

If you do come back to this report, it would be great to get your views of CPR. A developing story after your interview with @RebelHQ, the 20% rise since and then ... well ... yesterday.

thanks.

Paul Scott

28th Apr '16

Hi StandardModel,

Yes, I will try to circle back to review Carpetright (LON:CPR) at some point. Just haven't had time this week - been mega-busy.

Regards, Paul.

TraderTim

2nd May '16

Interesting to hear thoughts on a dividend. I am a long term Boohoo.Com (LON:BOO) holder, but am not so concerned about a dividend. The company has cash on its books for this financial year, but ultimately as a well positioned growth stock I trust the management here to use it in best interests of the company. As Paul writes, Boohoo.Com (LON:BOO) is in a good position globally, not just in nationally - international sales rising. I think Boohoo.Com (LON:BOO) has great potential here.

My only concern is the PLT issue - which again, Paul sums up nicely. The uncertainty and family overlap here make a little concern. It's hard to see how this option can not be seen as in the best interests of the shareholders - however, you can never be too certain of these things. From what I understand is a really fledging business, which is probably priced in a little to the valuation, so if it is a false hope then the share price will take a hit!

laynab

18th May '16

Paul,

Thank you for a sober analysis.

I too am long BOO.

I can't decide whether to add, on the basis of your optimism, noting that you ordinarily tend to shy away from high PE companies as a value investor, but have put forward a case for the bull case here, or sell, based on the contrary case outlined here:

http://www.telegraph.co.uk/finance/markets/questor/12098144/Questor-share-tip-Beware-the-siren-call-of-Boohoos-sales-figures.html

Investing is part science, part art, and then doing what we're comfortable with, based on personal judgements. I wonder what your comments might be on the implied criticism made by Questor about BOO?

Many thanks.

AK

Seems a rather shallow review in the Telegraph, where does he get the pre tax profit only up 3% from, I can see up 42%?

Hmm. I had missed that. Any thoughts on the general narrative, notwithstanding his arithmetic errors?

I think he has a point, that they have cut margins to increase growth but even so profit growth is still rather high, but the shares are priced for growth. As for being expensive yes compared to high street retailers they are but compared to its nearest rival ASOS (LON:ASC) they look quite cheap. IMO they seem fairly priced I don't think I will be buying more at this price but if they do fall below 45p I may top up. If they shoot up to 60p I probably will take some profits. Paul knows the business I would be inclined to read his in depth articles rather than newspaper tipsters.

smallcapman

That Questor article was based on the Jan trading update, and was written at that time.

A bit like a retail rollout, you make the big money when the expansion/rollout slows or stops. As an analogy, if you look at Crawshaws, it's furiously opening new shops and the profits are ploughed back into the expansion. Once a target saturation level has been reached, then the expenses reduce dramatically, and the profits escalate exponentially.

In the case of BOO, it's building a customer base and brand loyalty. In the expansion phase it's just the same. Many great growth companies are never cheap on conventional metrics for several years.

Scm

mpat89

2nd Jun '16

Does BOO not target the 18-24 market?
How does the expansion phase of building a customer base and brand loyalty work if the target market is constantly changing as the 24+ yr olds leave and the 18+'s join. Surely the marketing spend will always continue due to this.
I take ASOS as an example, I used heavily up to the age of 25ish after which I pretty much stopped as I grew out of their styles

Small Cap Value Report (26 Apr 2016) - BOO

Sprue Aegis (SPRP) Meeting

Boohoo.Com (LON:BOO)

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Paul Scott

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