Small Cap Value Report (Thu 6 Apr 2017) - FREE, MTC, MYSL

Thursday, Apr 06 2017 by
63

Good morning! It's Paul here.

First day of the new tax year. I've already seen some Tweets from sensible private investors that I follow, saying that they're about to deploy their freshly invested cash in ISAs and SIPPs. So perhaps that might provide some support for small caps? (the amounts are probably too small to make any difference to larger caps).

I'm hearing that AIM IHT fund managers are seeing good cash inflows from clients too. So that's also a positive for decent AIM shares, because they'll generally keep buying more of their existing holdings in the market.


Today I shall definitely be reporting on: FreeAgent Holdings (LON:FREE) , Mothercare (LON:MTC) and MySale (LON:MYSL) .

Time-permitting, I also hope to cover some or all of these: Epwin (LON:EPWN) , Motorpoint (LON:MOTR) , Findel (LON:FDL)




FreeAgent Holdings (LON:FREE)

Share price: 121.5p (up 4.3% today, at 09:26)
No. shares: 40.7m
Market cap: £49.5m

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

Trading update - for the year ended 31 Mar 2017

This is a recent float, with the shares listing on AIM in Nov 2016.

The company provides cloud-based bookkeeping software, specifically designed for micro businesses. It's important to grasp that this software is very user-friendly, and easy for non-accountants to use. Hence it's ideal for the smallest businesses - often one person bands, like consultants, or self-employed tradespeople.

The closest competitor is probably QuickBooks, which is advertising a similar product on TV at the moment.

Other cloud-based software products like Xero, are not really direct competitors, as they are much more feature-rich, and less user-friendly (I use both Xero & FreeAgent personally, for small businesses that I'm involved with).

As part of researching the share, I took a free trial of FreeAgent. After playing with it for an hour or two, I liked it so much that I transferred my limited company accounts onto it permanently. It drastically simplified my tax year-end. So I'm a very happy, paying subscriber. It's a terrific product, which is remarkably easy to set up and use.

I've also asked several firms of accountants what they think of…

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As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested.


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FreeAgent Holdings plc is a holding company. The Company is a provider of cloud-based software-as-a-service (SaaS) accounting software solutions and mobile applications designed specifically for the United Kingdom micro-businesses. It is engaged in the development and provision of the FreeAgent SaaS solution. With its software, its offering streamlines financial management, bringing together invoice and expense management to value-added tax (VAT) and payroll. It even enables users to automatically generate and submit their self-assessment tax return filings to Her Majesty's Revenue & Customs (HMRC). Its SaaS solution comprises various features, such as core invoice generation and bank reconciliation functions. Its SaaS solution is also integrated with other suppliers and an application programming interface and associated developer portal to enable third-party developers to exchange data between the Company and their own products. It offers its services through its product platform. more »

LSE Price
91.5p
Change
 
Mkt Cap (£m)
37.3
P/E (fwd)
n/a
Yield (fwd)
n/a

Mothercare plc is a retailer for parents and young children. The principal activity of the Company is to operate as a specialist omni-channel retailer, franchisor and wholesaler of products for mothers-to-be, babies and children under the Mothercare and Early Learning Centre brands. The Company's operating segments include the UK business and the International business. The UK business segment includes the United Kingdom store and wholesale operations, catalogue and Web sales. The International business segment includes the Company's franchise and wholesale revenues outside the United Kingdom. Its clothing and footwear product includes ranges for babies, children and maternity wear; home and travel includes pushchairs, car seats, furniture, bedding, feeding and bathing equipment, and toys are mainly for babies. It operates in the United Kingdom through its stores and direct business, and across the world in over 60 countries through its international network. more »

LSE Price
97.54p
Change
2.4%
Mkt Cap (£m)
162.8
P/E (fwd)
8.7
Yield (fwd)
n/a

MySale Group plc is engaged in operating online shopping outlets for consumer goods, such as women, men and children's fashion clothing, accessories, beauty and homeware items. The Company's segments include Australia and New Zealand, South-East Asia and Rest of the world. It operates with flash sales Websites in Australia and New Zealand (ANZ), South-East Asia (SEA) and the United Kingdom. Its Websites host time limited flash sales in each of its territories. These flash sales are focused on fashion, apparel, health, beauty and homeware categories and are undertaken on a consignment inventory basis. Its retail Websites also focuses on these product categories using drop-shipped inventory. Its flash sales brands include OzSale and BuyInvite in Australia, NzSale in New Zealand, SingSale in Singapore, and MySale in Australia, New Zealand, Malaysia, Thailand, the Philippines, the United Kingdom and Hong Kong. more »

LSE Price
102.25p
Change
-1.2%
Mkt Cap (£m)
156.6
P/E (fwd)
70.0
Yield (fwd)
n/a



  Is FreeAgent Holdings fundamentally strong or weak? Find out More »


43 Comments on this Article show/hide all

herbie47 6th Apr 24 of 43
1

I think gold is a pretty good hedge at the moment, I can see things getting worse in the next 2-3 years, how long has the bull market lasted? when was the last recession? Elections in Europe, Brexit, Trump, North Korea, Syria, the world is getting a more volatile place. Yes it's a short term investment, it's not long term.

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seadoc 6th Apr 25 of 43
1

In reply to Camtab, post #23

Camtab,

"Zuma has all the hallmarks of a Mugabe and things could get a lot worse before they get better."

Voted up for that but:

"Also the reason I have never backed Norcros which as Paul has stated several times appears undervalued."

Mrs Zuma does not like her new bathrooms?

Seadoc, holding a few Norcros (LON:NXR)

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crazycoops 6th Apr 26 of 43
3

Seadoc, re: IQE (LON:IQE) in 2016 there was a significant increase in capex which was focused on ramping up production capacity. My hunch is that is connected to the new smartphone releases this year but the company are constrained by NDAs so for now, it is all speculation. This said, the trading volumes are very large at the moment and almost certainly a result of increased institutional activity. IQE (LON:IQE) is probably my riskiest holding at the moment but things could get very interesting in H2.

Blog: Share Knowledge
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seadoc 6th Apr 27 of 43
1

In reply to crazycoops, post #26

crazycoops,

"in 2016 there was a significant increase in capex ...."


Cash flows from investing activities: 2015 2014
Capitalised development expenditure (4,979) (4,957)
Investment in other intangible fixed assets (1,198) (1,291)
Purchase of property, plant and equipment (3,825) (3,178)
Net cash used in investing activities (10,002) (9,426)

I assume you mean that in May 17 we will learn that the cash flows from investing in Capex will show an increase in 2016 compared to the figures above?

".....which was focused on ramping up production capacity."

But they already have surplus capacity, and a bit, at the moment. Yes could be a change of plant rather than more of the same but I have a horrible feeling that the "spend" will be related to donations to the new centre at Cardiff University.

"...is probably my riskiest holding at the moment but things could get very interesting in H2."

Voted you up for that! Just my view,

Seadoc

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crazycoops 6th Apr 28 of 43
4

Seadoc

But we've already had the final results for 2016. Capital investment (tangible and intangible) was up 90.6% from £10m to £19.1m - that's what I was referring to.

http://www.stockopedia.com/share-prices/iqe-LON:IQ...

"Capital investment increased to £19.1m to address near term growth opportunities"


Blog: Share Knowledge
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FREng 6th Apr 29 of 43

Triad (LON:TRD) (which I hold) put out a bullish update today at 2pm! SP rose 17%

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xxx 6th Apr 30 of 43

In reply to Paul Scott, post #19

Agreed.
It is a manifestation of the unequal status of private shareholders.
You might consider standing for parliament.In too many areas, when the review bus of legislation comes around, the changes are limited to a few areas, with a view to the headlines and PR, rather than a careful, one off enshrinement of sensible practice based on a principle, in this case equality.
Management pay is another area.

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seadoc 6th Apr 31 of 43

In reply to crazycoops, post #28

Sorry crazycops,

Thank you, I thought I had seen the results, it is the AR that will be available in May. Mind you the initial results are even more perplexing:

Profit is another 19,440,000 but cash up but 4,957,000 (from 4,644,000). Cash used on investing is well up, £30m from £10m but this includes capitalised development of £6.3m up from £4.9m and even more worrying deferred payment to Koplin of £11.25m. I thought this was already included in the accounts of three years ago? Not sure I can find new capex of £19.1m anywhere in that.  Indeed £19.1m from £10m less £11.25 less £(6.3-4.9)m is actually significantly less capex?

".... to address near term growth opportunities"

Yes it was near term but recent near term and not actually in the future?

Regards,

Seadoc

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abtan 6th Apr 32 of 43
1

In reply to Philip Wigg, post #22

Hi Phillip

I agree with all your points.

A lot has changed in the last few years as the government clamps down on one-person limited companies (though I didn't realise the IR35 changes affecting public sector workers are being pushed (have been pushed?) into the private sector as well.)

I can't remember the details, but I thought that the IR35 changes were mainly going to impact higher earners, so maybe those on lower rates operating through Ltds will be happy to continue using, or start using, a company like FreeAgent?

2 other points come to mind:
- I believe the government is also coming down on companies such as Parasol, so maybe people will be less inclined to shut down their ltd companies?
- If a recession is coming, I believe there's usually a boost in people setting up shop for themselves, either as sole traders or though limited companies, so that could be a boost, albeit a short-term one, for the likes of companies like FreeAgent.

For reference I do not hold.

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crazycoops 6th Apr 33 of 43
2

I took near term to be in the future rather than the present or recent past. Either way, one would expect to begin to see a clear return on this investment as 2017 results unfold. Time will tell if that is so.

Blog: Share Knowledge
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Philip Wigg 6th Apr 34 of 43
2

In reply to abtan, post #32

I work as an I.T. contractor so I'm fairly up on this stuff.

The new changes may well mean that a lot (most?) contractors will now be deemed to be inside IR35. That's because the end client or agency now has to make the decision instead of the worker (contractor) about whether or not the worker is inside IR35 or not.

At the moment, this only applies in the public sector. See http://www.contractoruk.com/ir35/public_sector_contracting_april_2017_ir35_changes_explained.html

There are credible reports on LinkedIn, etc. that people are working on software to enable the same changes to be brought into the private sector too. That would seem to be common sense, why keep it just to public sector contractors?

There is no crackdown on companies like Parasol. You might be confusing them with dodgy offshore "loan" schemes, etc. ? It's not like that. Using Parasol means that the contractors are an employee for tax purposes and pay "normal" amounts of tax which is what the government wants.

AFAIK, it makes no difference how much you earn although there's a point at which running a Ltd company isn't worth doing if your rate is too low.

It's quite possible that FreeAgent Holdings (LON:FREE) can increase revenue from sources other than contractors. However, I imagine that contractors are a big chunk of their revenue. Maybe I just think that because I am one?

But, if I were to start contracting now, there is no way I would bother going down the Ltd. co route because there's no point financially anymore really.

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bestace 6th Apr 35 of 43
2

In reply to seadoc, post #31

The £19.1m capex is broken down as £6.3m development expenditure, £1.8m intangibles and £11m of property, plant and equipment.

On the deferred consideration for Kopin, I think you are confusing cash and accounting transactions. The deferred cash was paid in January 2016 which is why it appears in the cash flow statement for this period, but the acquisition itself took place in January 2013 so the whole cost of the investment was recorded in the books at that time with the deferred payment being carried in the books as a liability until it was settled last year.

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Paul Scott 6th Apr 36 of 43
2

In reply to Philip Wigg, post #34

Hi Philip.

Interesting. I suppose the key question is what percentage of FreeAgent's clients are actually contractors? It may only be a small minority, who knows? It's probably something we need to find out.

There are millions of small businesses which are bona fide, and not operated for any tax benefits.

Regards, Paul.

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Philip Wigg 6th Apr 37 of 43
2

In reply to Paul Scott, post #36

Yep, true.

I would guess a fair chunk of them are contractors. But they probably have loads of freelancers like photographers, web designers, etc. So I don't know.

It's great software, I use it myself. They don't seem to have great competition either.

I wouldn't be surprised to see it be bought out by Sage.

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gsbmba99 7th Apr 38 of 43
2

FWIW, according to Digital Look, the expectations for FreeAgent Holdings (LON:FREE) are Revenue - £7.62m for y/e 3/17, £10.25m for 3/18 and £13.21m for 3/19. PBT - (£1.89m) for 3/17, (£0.27m) for 3/18 and £1.5m for 3/19. EPS - (4.39p) for 3/17, (0.62p) for 3/18 and 3.48p for 3/19. Revenue for 3/17 of £8m looks to be a few percent ahead of the estimate. PBT margin on incremental revenue looks to be 61% for 3/18 and 59% for 3/19 so a lot of additional revenue is expected to drop through to PBT. Don't know enough about the company to know how they treat development expenditure.

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simoan 7th Apr 39 of 43
1

In reply to bestace, post #20

Much as I admire Buffett’s quotability, it should be borne in mind that he is talking as a long term buy and hold owner of a portfolio of businesses whose success is directly correlated with the health of the global economy over the long term.

Yes, I agree and that's pretty much my approach too. I could live for another 35 years and will need to use my investments as income in future, because by the time I get to retire the government are not going to give me anything, so I am taking a long term view of being in equities.

People buy gold as a hedge. If like Buffett you’re happy to hold through the down cycle in anticipation of recovery on the other side, then using gold as a hedge makes no sense.

IMHO it's a very crude hedge for a portfolio of UK Small Caps as we normally discuss here, so I don't really understand why people mentioned it. I am nearly 40% cash in my SIPP and can't for the life of me see why I should use new money to hedge by buying a Gold ETF. What does that achieve? Yes, I have some holdings which are looking expensive, but that's a long way from expecting the world to end, so why not sell and buy something cheaper or hold cash - why go long Gold? I have never understood the attraction and the thought of wearing it makes me shudder :) If I ever buy gold it will be just before I buy the tinned food, ammunition and disappear into a secure bunker... I had this discussion with someone that works in financial services in 2010 and he was stuffing Gold in his and his wifes ISA's instead of equities....where has that got him?

All the best, Si

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herbie47 7th Apr 40 of 43

In reply to simoan, post #39

If shares crash then gold will almost certainly go up. Small companies are more likely to go down more than large caps. Is your portfolio anything like Warren's Buffett's? Most of his holding are US large caps. Cash is not earning anything. So what is your cash doing?

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crazycoops 7th Apr 41 of 43
2

For me, gold comes into it's own when there are black swan events and forex volatility. However, rather than buy gold ETFs, I have a couple of gold miners who are a) profitable at a much lower gold price and b) pay a dividend. I have also been working on identifying equities to use as cash proxies (low volatility and/or defensive), again dividend paying. If/when markets get more toppy, I'll add to these holdings. The primary aim being to have a segment of my portfolio that can earn a decent divi while providing funds to buy other holdings at lower prices if there is a big market fall.

The motivation for this is that I spent 5 months of last year holding 40% cash (Brexit/Trump etc.) and I have really been feeling the loss of divi income as a result. The market can stay irrational longer than expected, so I am looking for an alternative strategy to benefit from this bull run while having a decent hedge in place that is less of a drag on the portfolio than either holding cash or shorting the index.

Blog: Share Knowledge
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bestace 7th Apr 42 of 43
2

In reply to simoan, post #39

Being 40% in cash is itself a hedge of sorts and I suspect people might not have suggested gold if they had known you were a cashed up Buffet-style investor.

That being the case, I wouldn't worry so much about your stocks looking expensive. Chances are you could sell and they continue to get more expensive, or if they are long term compounders they will grow into their high rating over time, or you sell and end up buying stocks of lower quality stocks which look cheaper.

If you haven't already read that Lindsell Train case study on Unilever (LON:ULVR) from a couple of months ago, I can recommend it - it was basically showing how if a company can compound its earnings over the long term, movements in its PE ratio are rendered pretty much irrelevant, i.e. don't worry if a quality stock looks expensive now if you intend to hold it for the long term.

I'd say that's even more true of small caps on the basis of the 'elephants don't gallop' theory. It's difficult to know what individual stocks to suggest without knowing what you currently have in your portfolio but if you are holding your existing stocks with conviction on their quality if not their value, I'd suggest just topping up on those in light of the Lindsell Train evidence.

By the way if your friend was selling his gold in 2011 or 2012, he could have made a tidy profit. From the perspective of 2010 I can sort of see the rationale for buying gold as a hedge against inflation, given the then prevailing view was that masses of QE would inexorably lead to masses of inflation. That may still happen of course.

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simoan 9th Apr 43 of 43
2

In reply to bestace, post #42

Hi bestace,

Being 40% in cash is itself a hedge of sorts and I suspect people might not have suggested gold if they had known you were a cashed up Buffet-style investor.

That being the case, I wouldn't worry so much about your stocks looking expensive. Chances are you could sell and they continue to get more expensive, or if they are long term compounders they will grow into their high rating over time, or you sell and end up buying stocks of lower quality stocks which look cheaper.

Thanks for your thoughts as ever, which I always find worth reading. Yes, I can see cash could be used as a hedge but I don't feel the need to be hedged currently and it's not something I have bothered with in the past. 

As a bit of background I am not retired or a full-time investor with essentially a fixed size pot to protect and I am lucky enough to have very good personal cashflow to almost constantly invest. At work I am seeing anything but a world that's about to come to an end, quite the opposite in fact. I work in technology and my company has just had it's busiest quarter ever (and Q1 is normally the quietest) so there is a lot of new product development taking place or about to start and the general mood and outlook across a number of industry sectors related to technology is currently very buoyant.

If you haven't already read that Lindsell Train case study on Unilever (LON:ULVR) from a couple of months ago, I can recommend it - it was basically showing how if a company can compound its earnings over the long term, movements in its PE ratio are rendered pretty much irrelevant, i.e. don't worry if a quality stock looks expensive now if you intend to hold it for the long term.

Thanks, I wasn't aware of that case study and will take a look, although it sounds like the same approach used by Terry Smith and I already have a large holding in Fundsmith.

I'd say that's even more true of small caps on the basis of the 'elephants don't gallop' theory. It's difficult to know what individual stocks to suggest without knowing what you currently have in your portfolio but if you are holding your existing stocks with conviction on their quality if not their value, I'd suggest just topping up on those in light of the Lindsell Train evidence.

This was pretty much the conclusion I had come to. I'm happy to do this for some of my holdings but not all; things like Boohoo.Com (LON:BOO), Trifast (LON:TRI), Treatt (LON:TET), IG Design (LON:IGR), Tristel (LON:TSTL) are all looking pretty expensive on any conventional measure, and realise I have transmogrified into a Momentum investor :)

All the best, Si

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About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for Stockopedia.com on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »

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