Small Cap Value Report (8 Mar 2016) - BOOM, WGB, RGS, LAKE, JPR

8th Mar '16 by Paul Scott

25 comments 21486 reads

Good morning!

I had a look at results from Telit Communications (LON:TCM) last night, and updated yesterday's report quite late, so here is the link for that.

Audioboom (LON:BOOM)

Share price: 3.25p
No. shares: 535.6m
Market cap: £17.4m

Results y/e 30 Nov 2015 - these figures are shockingly bad. Turnover for the year was only £192k. The company managed to rack up a £7.5m operating loss. This is complete madness.

The cash pile reduced from £8.9m a year earlier, to £3.1m at 30 Nov 2015. Given ongoing heavy cash burn, the company must be close to running out of cash by now.

It's always jam tomorrow with Audioboom, and no doubt conversations are already ongoing with existing shareholders, to see what appetite they have to pour fresh cash in, to support its continuing cash burn.

This type of business model - heavy cash burn, with repeated rounds of fundraisings, is probably the worst type of investment you can imagine. This type of company very rarely succeeds commercially (although the ones that do succeed, can occasionally do so in a spectacular way). I think it's dawning on investors that Apps seemed a trendy idea a couple of years ago, but in reality are just black holes for cash, usually run by delusional characters who believe their own hype.

I've probably mentioned it before, but if you want a riveting (and relatively short) read, on a dot.com boom & bust story, then "Boo Hoo - A Dot.Com Story from Concept to Catastrophe" (nothing whatsoever to do with Boohoo.Com (LON:BOO) by the way) is an absolutely brilliant book. It's about one of the first dot.com disasters, called Boo.com which had a shoot for the moon type of business model, and it collapsed when the funding dried up. Eventually shareholders tire of putting fresh waves of money into cash-burning businesses.

So the historic numbers for BOOM look a complete joke. However, there is a second announcement from the company today which gives a glimmer of hope;

Q1 Quarterly Update - as the begging bowl is out, the pressure is on to issue some positive news. Therefore in such situations I'm always particularly sceptical about the claims being made.

Nevertheless, this bit sounds quite interesting;

Revenue in Q1 exceeded the total revenue for the full year…

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simoan

8th Mar '16

Paul,

Did you dump your holding in WGB? I notice you do not have the usual disclaimer above.

I dumped mine first thing after the flooding because I didn't see the point of holding one of my low conviction positions (and a fairly richly valued one at that) through such uncertainty. It's a quality company, no doubt, and one of the more exposed to Brexit (being an exporter with manufacturing in the UK) and the much discussed decline in top-end London property.

All the best, Si

JohnEustace

My problem with understanding Telit is that they are basically an Italian company listed on AIM. The CEO and research facilities are in Italy, they have loans from the Italian government. The UK sales office is at Badgemore Park Golf Club, which is a nice location to work from.
As you say Paul, they are in a segment with enormous growth potential, so high R+D costs seem reasonable to me - in fact to be expected. I know a couple of privately held companies working in this space and there are huge opportunities for the technology - but it will have to be at the most competitive commodity hardware prices. I've looked at the Telit product offerings and like some of the service based things I see because that's where I see the future profit opportunities - get the hardware in the field and then earn fees for collecting, analysing, and reporting the data. They also say they are working with top manufacturing partners which reassures me.
Does anyone here have experience of them - are their products or technology ahead of the competition? In the currently overused term, do they have or are they building a moat?

Paul Scott

Hi Simoan,

That's correct - I don't currently hold WGB.
No particular reason - and not anything to do with the insurance claim - I just periodically prune my portfolio for clutter, and low conviction things where I don't see much immediate upside. In particular, I cut back on a lot of things that looked fully valued in January, when the market started going wobbly.

From memory, I seem to recall that the account I held WGB in was on margin call in January briefly, due to losses on other things, so I think it was a question of chucking out whatever I felt had the least upside at the time.

It's on 19.4 times forward earnings, so I think that looks a bit rich right now. I might revisit it at some point in the future.

Regards, Paul.

Rusty2

I thought they were Israeli?

Ramridge

Re. Telit Communications (LON:TCM) To me , this company presents a dilemna. I am very keen on the future of IoT. This is real with enormous potential and demand. Much larger companies such as Intel, Ericsson, ARM, Laird are focussing on growing this part of their business.

On the other hand, it looks as if TCM's hardware and associated software services just do not have the margins to compete. If you add the capitalised $26m of software development back into the p&l expenses, their Operating Profit becomes a loss of (18.8m -26m =) - $7.2m.

FCF in the latest accounts comes down to a meagre $6m.

On balance since there doesn't appear to be pricing power, and since I cannot see how they can cut R&D and development in a significant way, I will watch this share from the sidelines.

alan000@yahoo.com

I think the Lake piece is interesting. It is right to flag all sorts of caveats around a current P/e of 4. However, one can see a "bull case" by arguing that the huge correction in share price that accompanied the profit warning was disproportionate...based on it being too initially vague, and that any IPO which quickly warns on profits is often spanked very hard indeed. The Peel note was much more specific, and todays announcement seems to confirm they are target for that, with almost half the year now done. Director buying in the aftermath of the warning too.

HI Paul,

I completely agree with regard to the current valuation of WGB; it's difficult to see much upside although they have a large percentage of International revenue and so should gain from any further depreciation in Sterling. Under the circumstances I thought the trading update today was very good and IMHO the management seem to have handled the flooding disruption extremely well through what must have been a very tough period, which is another tick in favour of the company.

The share price has held up very well despite wider market jitters and is back to just below where I sold in December. I like the company and like you will probably revisit it again in the future.

I guess it's fairer to say they are an international business. They have been growing through acquisitions and have R+D bases in Israel and the US as well as Trieste and Sardinia. They have bought units from NXP and Motorola.
For me they are a genuine business working in an exciting area and talk of exposes is not warranted as I see it.

peterthegreat

I always find comments from other shareholders interesting and am always puzzled why I never seem to do as much trading as is implied by many of the comments. I'm afraid I never prune my portfolio for clutter as (I hope) the shares it contain are all high quality, high conviction companies which would only be sold if something fundamentally changed about their business. In the case of WGB, which I have held since March 2012, I don't think the flooding has changed my opinion of the quality of the business, particularly as the right insurance was in place. It is certainly a negative for the business as there will be extra expenditure on insurance and flood defences and I do not know how much this will cost, but my opinion is that this does not fundamentally change the investment case, which is based on other things such as the long term financial record, the brands, and the expansion prospects offered by the company's international markets. It is true that the p/e is currently at a level typical of decent quality businesses but, for my philosophy, this does not trigger any sell signals, it's just what you might expect.

rumplestiltskin

Hi Paul,
I keep reading articles about "storm clouds building on the horizon" for the world economy. Do you have any views on the subject?

I've never looked at Telit before but the front page of their website alone has totally put me off to be honest. This kind of thing would really annoy me as a potential customer:

"YOUR BUSINESS RELIES ON NEW BENEFITS FROM THE INTERNET OF THINGS."

Err, no it flipping doesn't!! In fact, most businesses can get by perfectly well without connecting their most important assets to the Internet. Apart from anything else the security ramifications of doing so are potentially quite shocking. I work in data security and IMHO the whole IoT hype is a massive accident waiting to happen; hackers will have a field day (be they a 16 year old in his bedroom or a foreign government) because most IoT companies are completely incapable of implementing data security properly.

Apart from anything else I really can't see what Telit does that other companies cannot, so it's no wonder their selling prices are reducing because it looks like "me too" technology. No wonder NXP and Motorola were happy to sell on their business units.

JDW72

With regards Audioboom, I find it a nightmare to use. It's forever freezing and cutting out whether I use it on my iPhone, iPad or laptop if I am not connected to a LAN. I have good wifi and 4G connection when trying to use it off-LAN (central London so not "in the sticks"). When I am "on the move" is unfortunately typically when I like to access the content.

I now actively seek out other ways of obtaining content now as the Audioboom app is such a pain. The "Daily Download" functionality isn't very efficient either with the queuing architecture appearing to freeze at the slightest hint of a queue even if on a LAN! It's got so bad I've turned that bit off.

If it was just one of my devices I'd be inclined to blame that but it's not and I know others who have reported the app struggling in any scenario where they don't have a direct LAN connection.

In all honesty, I think the app's just crap unfortunately.

00mrmark00

Hi Paul, any thoughts on Brammer.

http://www.stockopedia.com/share-prices/brammer-LON:BRAM/

I know its more of a mid-cap so prob out of scope. Cheers, Mark

nehpets

"The UK sales office is at Badgemore Park Golf Club, which is a nice location to work from"

Yeah, just outside Henley on Thames no less...

ISAallowance

Re. Tellit (TCM) I haven't used their products personally, but I've worked alongside an R&D engineering team that were using one of their GSM modules - from memory the datasheet looked great but actually integrating the module and getting it to perform to spec was problematical, and support not good. I don't know whether there were/are good alternatives, but it certainly wasn't the sort of execution that would inspire ongoing brand loyalty if alternatives exist.

I have no position (or interest) in this share long or short.

TheWatchmaker

9th Mar '16

Interesting RNS this morning from Lakehouse. Slater Investments/Steve Rawlings looking to take a more active involvement in running Lakehouse with request for General Meeting with proposal to appoint 3x non-execs of their choosing and oust the incumbents.
http://www.londonstockexchange.com/exchange/news/m...

Yes its very interesting and I see the shares are up today. Any views on the chances of this happening?

Sorry, I don't have enough experience in this area to comment on likelihood of this going ahead.
Maybe others with experience of these matters can comment - perhaps Paul Scott will expand on his views in his SCVR later.

thowed

11th Mar '16

Paul - glad you enjoyed the Boo.com book - I worked on the book as a young business book publisher, and met the two founders. It was a good, early lesson for me in the potential excesses of the stockmarket!

Brilliant Leader

Paul has commented on the SCVR for 9th March

Small Cap Value Report (8 Mar 2016) - BOOM, WGB, RGS, LAKE, JPR

Audioboom (LON:BOOM)

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Paul Scott

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