Small Cap Value Report (Mon 20 Mar 2017) - TUNE, TAP, PEBL, FIF, MBH, MAI

20th Mar '17 by Paul Scott

38 comments 21872 reads

Good morning!

I note from the comments that one or two readers get confused about who is writing each report here, either me or Graham. I'm not sure how to say this without sounding sarcastic. The clue is that the relevant author's name, and a massive photo of their head, appears at the top of each article.

Today I intend writing about;

Focusrite (LON:TUNE) - positive trading update

Taptica International (LON:TAP) - strong results

Pebble Beach Systems (LON:PEB) - final settlement from disposal.

I've now done the above sections, but have to catch a train from London back to Hove. So I'll aim to complete the following bits later today (probably early evening):

Finsbury Food (LON:FIF) - interim results

Michelmersh Brick Holdings (LON:MBH) - 2016 results

Right, those are done now. Sorry I didn't get round to looking at Maintel Holdings (LON:MAI) results, ran out of time. There's a very brief comment right at the end.

Focusrite (LON:TUNE)

Share price: 215p (up 5.9% today)
No. shares: 58.1m
Market cap: £124.9m

Trading update - this company makes musical & audio equipment. It looks an excellent company, demonstrating consistent growth, and decent profit margins.

Its year end is 31 Aug 2017, so today's update covers H1, the 6 months to 28 Feb 2017.

The key section says;

...pleased to report that in the first half of the year good progress was made in both the Focusrite and Novation divisions and in all three reported regions, particularly in our important US market.

As a result, revenue is expected to be approximately £32.0 million for the six months ended 28 February 2017, up from £25.9 million in the same period last year. This represents an increase of around 12% on a constant currency basis.

Cash conversion was also strong during the period and as at 28 February 2017 net cash was £9.4 million, compared with £4.0 million on 29 February 2016.

The trouble is, no mention is made anywhere in the announcement about profitability. That's a glaring omisson, because the whole point of trading updates is to let the market know how a company is…

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chilligg

20th Mar '17

Hi Paul, re TUNE, I was looking at a presentation on the company's website and they have capitalized £2.7m of R&D the last two years, and like you I prefer to see that written off for prudence, so if you adjust fully for that, the rating is north of 23x. They didn't split out amort from depreciation (£2.6m in total), so not sure what the precise net figure would be. There is a positive tax effect from the R&D spend as well so they only paid 12.2% tax last year, so again how sustainable is that? Gross margins fell last year from 38.8% to 38.4%, but not clear if that is a trend. Keep up the good work!

MichaelFBS

I personally like to see larger shareholdings by directors and see at as a real positive. And surely 60 is the new 40 (being closer to 60 than 50 I hope so! :-)) and a chairman in his 60's and a small free float did no harm in the case of Avesco (LON:AVS) !! Indeed it might be a reason to buy because of the possibility of a takeover.

I don't hold but Paul's comments on Focusrite (LON:TUNE) will certainly make me investigate further as for me it ticks all the right boxes.

rouleur1

I own a Focusrite prosumer product (LON:TUNE) which I bought to help my podcasts sound better. The feedback on Amazon and elsewhere on their products is universally excellent. Their products command excellent prices on the second hand market. I had occasion to call their helpline with a tech query - the response, from a polite and well-informed human, was exemplary. They even followed up, unsolicited, a few days later to make sure my problem had been addressed.
You find their products also in music and production showrooms - these are very very busy places, packed with kids buying kit to make music, many of them accompanied by their parents and their credit cards. I share Paul's enthusiasm and having missed the boat on Gear For Music I am also tempted to take a small position, based both on Scotty's comments and my personal experiences.

Paul Scott

Hi Laughton,

Yes, I've also added some Fulham Shore (LON:FUL) to BMUS today. No particular reason - it was meant to be in there originally, as it's a stock I hold personally & am keen on, but it was overlooked. I just update BMUS when I remember, so sometimes things get overlooked. But it broadly mirrors my personal portfolio, in terms of my conviction buy/holds & position sizes. Although I've got a long tail of smaller positions personally too - should probably have a cull actually, as it can get unmanageable if you have too many things hanging around.

Regards, Paul.

cic

"risk to market forecasts is now to the upside" Paul, yours is one interpretation of the phrase, but another could just as easily be that whatever the forecast is we are now less confident of it! The English language provides plenty of ways to write in a way that expresses clearly what is meant. Politicians use confusing language so that we all read what we want to hear into what is said. When companies do it I tend to think they are trying to mislead - a bad sign.

bestace

From the last annual report (note 18), the amortisation charge on development costs was £1.963m last year and £1.816m the previous year, so if development costs were written off as incurred, last year's operating profit would have reduced from £7.14m to £6.387m and the previous year's operating profit would have reduced from £6.32m to £5.469m.

I'm personally more relaxed about capitalisation of development spend where the circumstances are right and if you can trust management not to play silly buggers - if there is a direct link between the development spend and the products for sale which are created by that development spend, then I think it can actually make sense to capitalise as the spend is then matched in the same period against the resulting revenues.

£TUNE amortise development spend over three years and say that a typical product life is between three and six years, so it could be argued they are actually being conservative in only amortising the spend over three years.

On gross margins, starting in 2012 their gross margins each year have been: 38.4%, 39.6%, 38.8%, 38.8%, 38.4% which looks reasonably stable to me.

Hi Bestace, I hadn't got to the annual report yet, so thanks for providing the net amortisation charge on dev costs. That all looks reasonable, especially in light of the conservative 3 year write-off policy. Looks like an interesting investment- with only c11% of the addressable market there could be a big growth opportunity still to come-but who are the biggest competitors and how fragmented is the space?

Having skimmmed through the IPO prospectus this morning, I can give you an answer on that!

Under section 6.3 ("Competitive landscape") they say this:

"Focusrite operates in a number of segments across its product range. The Directors believe that the market in most segments is fragmented with a wide range of competitors. The Directors believe Focusrite’s key competitors across its product ranges are: AKAI Professional LP, Ableton AG, Apogee Electronics Corp., Avid Technology Inc., Native Instruments GmbH, inMusic Brands, Inc. (M-Audio), Presonus and Yamaha Commercial Audio Systems Inc"

They seem to be growing a lot quicker than the overall addressable market, but as with most technology companies, there is an element of 'running to stand still' in that continual development spend is required to stay relevant.

On the other hand, their demonstrated ability to successfully bring new products to market on a regular basis could be seen as a moat.

At IPO they spoke of a development pipeline of 40 products; it's a shame they don't seem to refer as much to their pipeline in their post-IPO announcements.

Threepeat

Paul,
Thanks for your thoughts on Taptica International (LON:TAP). Before taking an opening position some weeks ago (having missed the initial RNS) in January I looked as far as I could for any problems in the accounts bearing in mind your earlier comments about Israeli companies and XLMedia (LON:XLM) in particular .In fact there is more information about Taptica International (LON:TAP) than XLMedia (LON:XLM) which provides some comfort I guess. With what looks like expansion into various geographies we must continue to expect cost related to expansion. Not exactly a retail roll out but you get the drift.
Topped up today.

Re Focusrite (LON:TUNE) this appears to be a lovechild of the founder, and this gives us comfort that even if it is pedestrian (?) nothing stupid will be done to upset it. Dived in with an opening position today

Paul, please continue to be sceptical. It helps us all sleep.

Steve

Very helpful, many thanks.

mw8156

anyone have any thoughts on AB Science seems to have come out with a good report today?

FREng

Volvere (LON:VLE) issued a positive trading update at 3pm this afternoon, leading to a 6% increase in price.

doug2500

I looked into Focusrite (LON:TUNE) a couple of months ago and concluded that I liked it but not at £2

What stops it being worth £2 IMO is a) capitalised development costs and, b) the volume of sales that are new products.

I can't access the report right now but I remember them quoting the amount of sales that were made up from recently released products. They made it sound like a good thing but my concern is that they will have to keep innovating and churning out new products to keep sales up. I could be wrong on this. I had hoped the price might drift down to 180 or so but no luck. I haven't fully shaken off my value instincts, although I am starting to pay more for growth.

I looked at XP Power (LON:XPP) at the same time and bought some at £18, hoping to add more on any weakness. they're now £20 and I'm left with a small position. C'est la vie. Lots of uncertainty in the market to come so I might get another chance. I, like Paul, prefer to build up a position. Sometimes you can buy more at a better price, or at a higher price with more up to date, and improved figures to work from. Sometimes the market moves up and you're left with a rump holding of a good business.

Doug
P.S. please keep it to one report, it's not that difficult.

Rusty2

Are not a lot of these "new products" just rebadged with minor upgrades or are they actually brand new products? I know with hifi many companies like Marantz will bring out a "new" cd player every year, except it's just the same as the old one with a different number and a few minor tweaks.

Focusrite (LON:TUNE)
That is possible Herbie I didn't dig that deep, I just took it at face value.
They do have a decent R & D spend though, not ridiculous but enough to make me think they need to run quite hard to maintain sales.

I think they do need to spend a fair amount as technology is always changing. Also I believe they are expanding their range into new areas, ie going from more pro music to more consumer market. You are probably right there is quite a bit of competition.

You're presumably referring to this statement in the last annual report:

"We spend over 6% of revenue on product development and seek to achieve about a third of our revenue from products launched within the last 12 months. The result: in FY16 we launched 16 new products."

With a product lifespan of between 3 and 6 years, something like 75%+ of sales must be from products released within the last 3 years.

Yes that sounds like it thanks.

That's a high churn rate of replacement products, I liked TUNE every other way, and this wasn't enough for me not to like it, but it was enough for me to not want to pay over £2 for them. Especially at a time when I preferred XPP.

Jan Urban

Hi Paul,
ref to: Focusrite (LON:TUNE). Looking at the cash flow stat. I noticed that the FCF from op activities is reducing on yr bases. Cash from op. activities for 2015: 6,2mil, in 2016: 3,9Mil and in the last stat. company said its down to 0,4Mil (half yr) putting it down to extending payment terms to one client and also noticed that the inventory increasing substantially. That makes me to hold back and keep it on my watch list.
Many thanks for your reports. Regards from Prague.
Jan

flyposter

24th Mar '17

Focusrite

I am very familiar with a lot of their products, Launchpad is a great piece of kit. At the moment there is a boom in people setting up commercial music studios that has been going on for sometime now, so many have popped up in Bristol where I live over the last 4 years and Focusrite and Novation are both very well known and respected for studio hardware and software. I really like the idea of them releasing Launchpad as an app, I am going to get it myself.

Well placed for growth IMO, I hold.

Small Cap Value Report (Mon 20 Mar 2017) - TUNE, TAP, PEBL, FIF, MBH, MAI

Focusrite (LON:TUNE)

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Paul Scott

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