Small Cap Value Report (Weds 1 Mar 2017) - RBG, EHG, MYSL, VTU, DX.

Good morning!

We did 2 reports yesterday, in case you missed them, as follows;

My report covered Revolution Bars (RBG) interim results, and BooHoo (BOO) trading update. I know BOO is a mid cap now, but as it's so popular with readers, I'm continuing to cover it.

Graham's report covered: Waterman (WTM) interim results, Redde (REDD) interim results, Avanti Communications (AVN) interim results, and Swallowfield (SWL) interim results.

Sorry we didn't get round to mentioning JSG & AVN.

New Stockopedia Charts

The big launch yesterday went well. Have you tried out the new Stockopedia charting package? They're terrific I think - a massive improvement on the old charts.

You can access the new charts for any company just by clicking in the usual place (the "Chart" tab, in between "News" and "Discuss", just below the share price) in that company's StockReport.

Or, another way to access the new charts, is via the "Tools" button on the main black menu. There's a shiny orange star next to it, just to help us find our way.

Here's a comprehensive guide to the new charts, which I will read later. I haven't quite managed to grasp one or two of the features yet.

Revolution Bars (LON:RBG) (at the time of writing, I hold a long position in this share) - just a couple of extra points to add to yesterday's large section on this share.

Interim results presentation - the company, very helpfully, posts the slides which it shows to institutions & analysts onto its website, so that the hoi polloi like us can also see them.

This company's presentation slides are here, then click on "Interim results presentation FY17".

I had a look through these slides last night. This only reinforces my conviction that this share is simply the wrong price, with a good 50%+ upside on it. As always, I may be right or wrong, that's just my personal opinion, not a recommendation - the emphasis is always on people to do your own research, and take responsibility for your own investing decisions. I do my best, but am not infallible by any means - and covering so many stocks, inevitably I do sometimes miss things.

A fund manager friend has kindly booked me in to a results presentation with RBG management today, so I have to finish this report early, in order to travel into London. So please forgive me the briefer comment than usual below.

Graham should be commenting on some more companies today too, which he'll do as a Part 2 article. So please check our SCVR landing page to make sure you see that. I'll put in a link later tonight, when I get back home after meetings in London.

Elegant Hotels (LON:EHG) - there was a reassuring trading update yesterday from this owner/operator of Barbados hotels. It said that bookings since the start of the current financial year (1 Oct 2016) have been in line with expectations. It remains "firmly committed" to its expansion strategy in the area.

My opinion - I quite like this stock, and it's on my watch list. I was worried that forex headwinds would hurt bookings (since 70% of business comes from British tourists, now facing a much stronger dollar), but so far there doesn't seem to be a problem.

Also, I think the company is over-paying dividends, and neglecting maintenance capex. I formed that view from mixed reviews on Trip Advisor, many of which refer to tired decor, and niggly faults. This is not good for a mid to high end hotel operator.

Aside from that though, it looks potentially interesting. It's not one I hold (yet), but don't be surprised to see it pop up in my portfolio at some point in the future.

MySale (LON:MYSL)

Share price: 122p (up 1.7% today)
No. shares: 151.3m
Market cap: £184.6m

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

Interim results - for the 6 months to 31 Dec 2016.

It's difficult to interpret these figures, because growth companies like this are attracting very high valuations (on conventional metrics) right now. Some of you might think this is all bull market froth. Others may focus on the point that once-in-a-lifetime changes are occurring in many industries, driven by technology & the internet.

Probably my favourite blogger, the Naked Fund Manager, writes a weekly column on Research Tree, which is essential reading in my opinion. In this article, he covers growth companies. There's a fascinating chart in it, where he has plotted the P/E ratio against actual earnings, for a successful growth company - Just Eat (LON:JE.)

What this graph shows, is that the company rapidly grew into an apparently crazily-high rating. I feel that a lot of value investors are missing out on some spectacular gains by overlooking this crucial point. Fixating on lower PERs will exclude the best growth companies from your investing universe - does that sound sensible?

Take Boohoo.Com (LON:BOO) for example. Some people thought the share was expensive when it was 25p, because it was on a forward PER of about 20-25! Well of course the growth has far exceeded expectations, and those broker forecasts back then turned out to be wildly wrong - they were far too pessimistic. Now, a couple of years later the company is probably heading towards 3p per share or more next year (I think the current broker forecasts are likely to again prove too conservative).

Is it worth paying 50 times earnings? Occasionally it can be - it just takes 2 years of strong growth to scrub away the excess, and you're then holding a high quality business at an entry price that after the event looks highly attractive.

Mind you, if there's even a moderate slip-up, then you can wave goodbye to 30-50% of your money in the blink of an eye.

Going back to MYSL results today, the most important bit for me is the outlook statement;

The group made a strong start to the year with significantly improved financial performance and good progress against the strategic goals. Customers are buying in increasing numbers, group trading metrics remain stable or improving and both gross profit and underlying EBITDA moved forward again.

The group carries good momentum into the historically stronger second half of the year and has a number of exciting initiatives which will support the future growth plans.

Growth of underlying EBITDA for four consecutive half year periods provides an endorsement of the group's strategic plan.  The board remains confident in the current year's prospects and that trading will be in line with the current range of analysts' projections of underlying EBITDA of A$8.5 to A$8.7 million.

Firstly, I'm delighted to see that the company has clearly stated what analysts projections actually are - between A$8.5m - 8.7m underlying EBITDA. This is so helpful, so many thanks. All companies should do this - brokers & PR people please take note & action! It saves everyone time, and avoids confusion. The company reports in Aussie dollars remember. (currently £1 = AUS$ 1.61).

Although, with highly rated growth companies, the market usually likes to see results exceeding expectations, not just meeting them. There again, in this market, this type of stock is not really being valued on a multiple of profits. Investors want to see top line growth, then seem happy with growth companies re-investing the extra gross profit into more marketing spend - to create a virtuous circle of self-funded growth.

Growth - revenue growth looks rather pedestrian for an internet retailer, at only 7%.

However, this is because there was a deliberate reduction in wholesaling. The main business (90% of activity is online retailing) showed respectable growth of +19%.

The gross margin improved too, which you would expect if low margin activity is reduced. Overall, gross profit increased by a reasonable +17% against H1 last year.

Valuation - on a PER basis, this looks completely nuts. Based on figures from one broker this morning, adjusted EPS is forecast to do this;

6/2017:   0.68p EPS - PER of 179

6/2018:   1.24p EPS - PER of 98

6/2019:   1.93p EPS - PER of 63

So clearly the market is not valuing this share on what are undoubtedly very unattractive, extremely high PERs. What's going on then?

Internet retailers tend to be valued on a PSR basis - because the assumption is that net profit margins will grow as the business grows. This does actually make sense, because overheads (particularly heavy marketing spend) gets diluted as sales grow rapidly.

MYSL is targeting a 5-7% EBITDA margin, and on considerably increased sales in a few years' time, the valuation would then potentially look quite attractive. It doesn't for now though, that's for sure. Growth investors don't value things on now though, they look into the future.

Business model - I was lucky enough to have an hour with the Chairman & FD when they were last in London, and I learned a lot more about the business model. There are several aspects of it that I really like;

• Emphasis on a flexible IT platform, built in-house
• Little inventories are held - 85% of stock is either never handled at all by MYSL (i.e. drop shipped by the owner of the stock), or is just an in & out job at MYSL's warehouses. This is a very efficient model, and results in no terminal stock write-downs.
• Relationships with many brands are being built, who are increasingly using MYSL as a selling platform, a bit like Ebay or Amazon, for clearing excess designer clothing & accessories. However, management see this broadening, into the company becoming a platform for general fashion sales, not just flash sales.
• Returns rate is exceptionally low, at 5%
• Very big and growing customer base
• 40% of sales are shipped from Northern hemisphere, to Southern. Thus MYSL has created a platform for brands to clear their excess end-of-season summer stock. This is being scaled up, as more brands join.

That's only a few quick points, not a comprehensive view. I think it does however give a flavour for this business being different to most other fashion ecommerce businesses.

Balance sheet - strong, with net cash. This is great because, as well as creating financial stability, it also means that no new issues of shares are needed. So growth in profits is for the benefit of existing shareholders. The company has barely issued any new shares since being listed, a very positive thing in my view.

My opinion - I see an opportunity here, and so far so good (I bought in at 40-50p, as documented here at the time). What could propel the valuation (potentially a lot) higher, is if growth accelerates. It's not bad at the moment though.

The numbers today look steady to me - I don't necessarily see any immediate upside on the current price, but who knows? Anything can happen in a bull market.

Drat, run out of time. Very quickly:

Vertu Motors (LON:VTU) (in which I hold a long position) - an in line update today. New car & van sales are down sharply, but this seems to have been offset by higher margins, and strong used car sales.

DX (Group) (LON:DX.) - planning permission on its major new hub has been refused. It seemed a fairly crazy idea to be spending so much capex, when the business is in decline.

Gotta dash, sorry!

Look out for Graham's report today, he's covering some more companies.

Regards, Paul.