Small Cap Value Report (Tue 18 Aug 2020) - SOS, TAST, ANG, GMR, BLV

Morning all! It's Paul here with the SCVR for Tuesday.

Please see above for today's announcements which I'll be covering.

Estimated timings - I got a bit bogged down in Sosandar, as usual! But I've got nothing else on today, so will carry on writing this afternoon until all sections are finished. Finish time: 4pm. Today's report is now finished.

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Gold

I see the price of gold is rebounding strongly, after the recent plunge. It's something I've started following (and went long, via a spread bet, on the recent dip). Some of the reader comments here have been interesting in recent weeks, and persuaded me to look at this area - whilst acknowledging I have very little knowledge of the resources sector, but do understand the basics, after many lunches with sector experts over the last 20 years.

With so much money-printing going on (QE), major currencies can't really devalue against each other, because they're all at it! Therefore, as readers have pointed out here in the comments, it's logical for the increased money supply to cause currencies to devalue against gold. That makes sense to me, in simple terms, hence why I bought gold on the dip.

Interestingly, yesterday it emerged that Warren Buffett Berkshire Hathaway has unexpectedly bought shares in a gold mine;

Buffett deserves credit for shifting his stance to the new reality as a result of the irrational policies of massive borrowing and money printing by U.S. leaders. Berkshire Hathaway BRK.A, -1.90% bought about 21 million shares of gold miner Barrick Gold GOLD, +11.63%, spending about $563 million. That’s according to a filing released Aug. 14. Buffett’s conversion to gold is a signal for other stock market investors.
[Source: CNBC]

The article goes on to say that Buffett has historically been negative about gold. So this sounds a significant change in stance. Hence I'll stay long (lucky timing!), as this move by Buffett could draw in other investors into this area, perhaps?

EDIT: do have a look at the reader comments below too, on this topic. Some interesting perspectives! This may not have been Buffett's decision, as it's a relatively small position, and he's handing over control to younger managers these days. Nevertheless, it's all about perception, hence I think Buffett's famous investment vehicle going in this direction is bound to influence other investors. End of edit.

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Residential property market

I've seen two interesting press reports this week re the UK residential property market.

This article from CityAM, is one of many that report Rightmove saying a mini-boom started in July, with asking prices rising by 2.4% compared with pre-covid prices in March. The annual rise is 3.7% in asking prices.

Agreed sales statistics are up very strongly - up 15% in July vs July 2019. No doubt this is pent-up demand to some extent, but it is nonetheless encouraging. You don't need everyone to be confident, only the relatively small number of people who buy or sell a house each year. Other reasons for optimism about housing transactions include: the Stamp Duty holiday, people working from home realising how inadequate their existing homes are, and of course super-cheap mortgages.

This could prove bullish for housebuilders, estate agents, DIY, and other housing-related shares. Or it could already be baked into those share prices, who knows?

Rentals - more interesting stats from estate agent Hamptons International. It says that a lack of tourists has led to former AirBnB properties in London being repurposed for long-term lettings. This has flooded the rentals market, and led to a remarkable 8.4% drop in rents in central London, and -4.2% in Greater London. This phenomenon only seems to have hit the South. Rents in the Midlands & North are still rising.

It's interesting to see how supply & demand interact, to move prices up & down.

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Sosandar (LON:SOS)

Share price: 19.75p (up 8%, at 08:12)
No. shares: 192.3m
Market cap: £38.0m

(I hold)

Full Year Results & Trading Update

Sosandar PLC (AIM: SOS), the online women's fashion brand, is pleased to announce its financial results for the year ended 31 March 2020. In addition, the Company is pleased to also provide an update on trading in the current financial year.

Current trading & outlook is more important than the historic numbers, so I'll focus on that first.

Previous update (7 July 2020) - Sosandar gave us a Q1 trading update (for Apr-Jun 2020) on 7 July, which I reported on here. To summarise, it said;

• Q1 revenues up 54%
• I worked out the split as: April & May up 62%, June up 38% - remember these are against soft prior year comparatives
• Marketing & other spending reduced heavily in response to covid
• Q1 loss reduced 70% on LY, and close to breakeven in June 2020 (gross margin up, due to less discounting)
• Cash at end June £4.4m, only slightly down on 30 April (but doesn't state how much tax payments have been deferred, so could be deceptive)

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Today's trading update -

The Company is delighted with trading at the start of its current financial year. In Q1 the business successfully increased year on year revenue by 54% whilst simultaneously reducing operating costs by 71% to help drive a 69% improvement in its loss position.

That's the same information as we were given last time.

July performance -

• Revenue up 57% vs LY (strong, and improved on June's c.+38%)
• Gross margin also strong at 55.5%
• Operating costs reduced by 84% vs LY - seems very extreme. I wonder what costs they are classifying as "operating"? I'd like to see the specific numbers here, as my feeling is that Sosandar updates tend to be over-polished sometimes
• Net loss down 83% vs LY - impressive, but again I'd like to see the actual numbers

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Returns - YTD returns rate is much lower, at 38% (50% LY).

The reasons Sosandar provides are;

...driven partly by product mix, but also by a shift in customer behaviour across all product categories. Even as returns begin to normalise again, we are seeing returns well below last year's levels

This is very interesting. Asos (LON:ASC) also recently mentioned an improvement in returns rate (i.e. fewer customer returns of unwanted goods), which has continued after ending of lockdown. The unknown factor, is whether customers are reluctant to go out to the Post Office, or other premises, to return unwanted goods? Whereas pre-covid it would have been easy to pop returns into the office mailbag. Working from home, it's more of a faff. I'm guessing there. Asos also mentions customer behaviour changing, to shop more specifically for products, and the category mix (e.g. stretchy fabric loungewear is more likely to fit well, than tailored office wear).

Overall, I'm sceptical whether this new, much lower, rate of customer returns is likely to persist long-term, to this extent. 50% to 38% is a huge drop, I can't see all of that drop being permanent, but who knows?

Cash position - was £4.34m at 31 July 2020, which is barely changed from end June, and end April. Whilst that's great, we are not told how much VAT and payroll taxes have been withheld? Absolutely key information, that is not provided. Companies must provide this information, in current exceptional times, otherwise the cash position is misleading. (It might be buried somewhere in the narrative, which I haven't read in full yet, so if any reader has spotted this info, please leave a comment below, and I'll correct the article).

EDIT: I queried this with Sosandar, who said that there is no deferred VAT, and the company was in a small VAT reclaim position. An immaterial amount (sub £100k) of other taxes have been deferred, with the agreement of HMRC. Hence the cash position does look clean. End of edit.

Next & John Lewis deals - as previously announced on 9 June, Sosandar is to join there online platforms. Excellent news. This should be seen as a form of marketing, to get the brand out there to many more customers. The online platforms make the profit, but it should nicely grow Sosandar's brand, and bring in new customers who might then become direct customers.

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Results FY 03/2020 - the numbers look grim, as expected. All that matters is, how do the figures differ from expectations (if at all)?

There was a profit warning buried at the end of a previous trading updates (re. an inventories provision), see my report here on 9 June 2020. The company said this was done because current trading is more important than historic numbers. I disagree. People bought the share on good current trading, but only realised by lunchtime that there was a profit warning at the end of the update. Meanwhile the house broker put out reduced forecasts to its client base only, and the rest of us were left with a misleading impression, until the penny had dropped around lunchtime. People buying on the opening bell felt aggrieved, when the price went back down again by lunchtime, understandably. This leaves a bad taste, and people don't forget these things. A profit warning should always be delivered clearly, not buried in the detail, at the end. Anyway, on to the figures today.

Key numbers for FY 03/2020;

Revenues £9.03m (just about matching the most recent guidance of "at least £9.0m")

Loss before tax of £7.8m, which is a bit worse than I was expecting (I'd estimated about £7m in response to the 9 June trading update)

Balance sheet - looks OK for now, with net current assets of £7.5m, including £5.3m cash. However, given the very high cash burn in the last year, this is not a secure long-term position.

Fundraising? - set against that, as mentioned above, the cash burn has drastically reduced in the new financial year, due to slashing costs, and surprisingly strong revenue growth. Therefore there's no immediate cash worry, but I remain convinced that SOS will need to do another fundraising, or maybe several. It's probably going to need more cash for the peak autumn/winter season inventories purchases, and marketing splurge.

That's not necessarily a problem though. Current trading is good, cash burn reduced (at least temporarily), and the share price has almost quadrupled from the covid low in March. Market cap now £38m, so a typical top up placing of £3-4m would only be about 10% dilution, hardly a disaster. As it wouldn't be a surprise either, then I don't think the market would necessarily take fright.

Note that despite negative comments I often read about Sosandar, it's still comfortably above the 15.1p price it listed at. Not bad, considering it's burned through way more cash than originally planned, in order to achieve the demanding original revenue targets.

Cashflow statement - very straightforward. Note the big increase in inventories, which look rather high to me for that time of year. Partly explained by management policy to buy all year round lines, such as denim, in greater depth, to avoid running out of bestsellers like in the past.

Operating cashflow was an eye-watering £9.1m for the year. This year's figure should be much lower, due to the big reduction in marketing spending, and increased sales. But it's still clearly a well short of sustainable breakeven, in my view.

My opinion - FY 03/2020 results are a little worse than I expected, but not enough to change my view on the share from my last update, where I made it clear that I'm not as positive on this share as previously, because it's costing so much more to execute the business plan. Hence that lowers the upside on the shares, because we're heading for almost twice as many shares in issue as originally when it floated. For that reason, I reduced my position size, as previously mentioned, and am more comfortable continuing to hold as a medium, rather than large position in my portfolio.

I still really like the niche, the unique perspective of management (and their work ethic & determination). Creating a brand like this from scratch is an incredibly ambitious project, and very few achieve scale, despite many trying. I think SOS is going to get there, but after a couple more fundraises probably.

I've printed off the full announcement, and will go through the narrative in more detail this afternoon, but let's get this up, as it's already taken up the entire morning!

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Tasty (LON:TAST)

Share price: 2.1p (down 9% at 12:03)
No. shares: 141.1m
Market cap: £3.0m

Trading Update

Tasty (AIM: TAST), the owner and operator of restaurants in the casual dining sector, announces the following update, further to the announcements made on 26 June and 3 July 2020.

Too small to mention here really, but I like eating in their Bou'mth branch, so thank you for your indulgence.

Planned reduction in workforce by >30% now largely complete

Up to 48 sites (out of about 56) will have re-opened in August, but;

... principally to take advantage of the Government's 'Eat Out to Help Out' scheme and reduced VAT.... Most of the remaining restaurants are not planned to re-open for the foreseeable future and some of the restaurants which are currently open may need to close again should they not reach expected trading levels.

Sounds grim to me. This is effectively a business on life support, like so many in the hospitality & retailing sectors. Therefore investors need to understand this share is very high risk. The equity could easily turn out to be worth nothing, or very little.

August trading - I like the frankness of this commentary;

The Company has experienced a positive level of sales this month to date, temporarily supported by the increase in people staying in the UK this summer, Government initiatives and pent up demand following the relaxation of lockdown restrictions since March, however, the Board expects future trading to remain challenging.

I've never seen their Bou'mth site so busy, every day, not just Mon-Weds half price food days under Eat Out to Help Out. Unfortunately, they've reduced the portion sizes , which customers notice, and really aggravates me, especially when the taxpayer is paying half the bill.

Outlook -

The Board remains extremely cautious regarding trading in September and is continuing to explore ways to minimise costs...

What else can they cut? It's obvious from my regular site visits to Bou'mth, that the staff are absolutely run ragged, and doing a remarkable job holding it together, whilst so obviously under-staffed.

Fundraising - this is more explicit than ever that the company needs to raise more cash.

It's blindingly obvious to me that Tasty needs to do a CVA or pre-pack administration, to jettison its onerous leases, and become sustainably profitable. I can't see why anyone would want to refinance it in an equity raise, without a CVA/pre-pack admin. You only have to subscribe for Draper's Record, Langton Capital, and Propel daily emails, to see that there's already a huge wave of companies in retail/hospitality going down the CVA/admin route, and requiring turnover rents, or drastically reduced conventional rents, to continue operating on a site by site basis.

On top of this, we've got the covid second wave risk facing us in the autumn/winter, when any higher transmission rate could kill off businesses like this which are only just holding on.

As a business, I like Tasty, it has modern, nicely fitted out sites, with an OK menu. But the rents need to come down drastically, and that can only happen quickly with a CVA/administration. They need to bite the bullet, and get on with it. Existing equity valuation? Between nil, and not very much, I'd say. There's also a big risk of de-listing, if the City cannot refinance it. Although I think a placing to fund a pre-pack administration re-starting of the business would be an attractive investment proposition. Personally I've made up my mind not to touch this share until it's done such a restructuring that involves getting rid of all the old leases. Competitors are lining up to do that, so anyone that doesn't is going to be at a great commercial disadvantage, paying too much in rents.

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Angling Direct (LON:ANG)

Share price: 56p (up 14%, at 12:58)
No. shares: 77.3m
Market cap: £43.3m

Half Year Trading Update

Angling Direct plc (AIM: ANG), the largest specialist fishing tackle and equipment retailer in the UK, is pleased to announce its trading update for the six months ended 31 July 2020.

ANG currently has 36 retail sites, and online operations in several countries.

I last reviewed it here on 3 June 2020, looking at its accounts for FY 01/2020. These results struck me as poor (a small EBITDA loss, blamed on flooding in January, low margins, and more conservative accounting). That was before covid struck as well. Further negatives were heavy expansion capex not generating any apparent return, and a business model that requires high inventories (very large product range). Hence my starting point is one of scepticism about this share. Let's see if there's anything today to change my mind.

H1 update today - key points

H1 revenue up 21% to £32.1m, despite all retail stores closed 24 Mar - 14 June

Retail sales LFL down 23% in H1, due to lockdown temporary closures

Online sales growth is strong at +43% in H1, UK & internationally - as I would expect, if the retail sites are closed. Standout countries are France (+62%) and Netherlands (+81%), but actual figures not given, so could be from a low base maybe?

Online revenues were £17.9m in H1, being 56% of the total (helped by retail sites being closed of course)

UK stores - very strong LFLs since re-opening: +75% from 15 June to 31 July. August to date not mentioned.

Net cash £21.0m at end July. Seems very high. It did a £5.5m placing in June, and only had £6.0m net cash at 31 Jan 2020. So where has the rest of this cash come from? Deferral of taxes could be part of the increase? It drives me mad when companies don't disclose the short-term benefit they have seen from deferring VAT & other taxes. It's really misleading. We need that information to properly understand the true underlying cash position. This information below is too vague;

Due to the strength of trading, associated cash conversion and working capital timing, the Company's cash position at the half year has grown strongly to £21.0m. In the period the Company raised £5.5m (gross) from a placing of new ordinary shares and arranged a £2.5m short term credit facility that remains undrawn.

It'll be interesting to see the actual cashflow figures when they're published. I bet the cash has come more from de-stocking & stretching creditors, than from profits. Hence, once these temporary factors reverse, I imagine the underlying net cash figure is probably a lot lower, maybe c.£12m level, is my rough estimate?

Margins - this is encouraging, and it follows the strategy the Gear4Music has successfully implemented, of raising margins, rather than chasing revenue growth (for vanity);

...the Company made good progress in the key areas of developing margin, increasing own brand sales penetration, improving working capital and leveraging efficiencies from previous supply chain and store investments.

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Outlook - a nice balanced commentary here;

Looking ahead, the Board believes that it is very well-placed within its market to benefit from "staycations" over the summer months, as well as heightened interest in angling as customers seek to take advantage of its numerous wellbeing benefits.

The impact of Covid-19 has created an exceptional sales period, with pent-up demand certainly experienced as a consequence of fisheries being closed for almost two months. Whilst the extent to which some of the exceptional trends will continue longer-term is not yet clear, with no further Covid-19 restrictions, the Board is expecting sales to begin reverting to more normal trading patterns during the remainder of the year.

The strong balance sheet means the Company is well positioned to withstand any further challenges, whilst also continuing to invest in key growth areas.

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My opinion - this seems a good update. I shall review the interim numbers with interest, when published on 14 Oct 2020.

I'd say the market cap looks reasonable, especially if ANG can do what G4M did, and drive up the gross margin on own brand products.

Macro trends this year seem to have worked to ANG's advantage, although how much of that is one-off, we don't know.

Overall, I'm starting to like this share. It looks more interesting after today's update. Although doubt I'll buy any myself.

A 5-year chart like this tells me that the market is sceptical, and that it would need something fairly substantial, and enduring, to convince investors that it's suddenly become a good business.

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Gaming Realms (LON:GMR)

Share price: 22p (up c.4%, at 14:19)
No. shares: 286.0m
Market cap: £62.9m

(I hold)

Trading Update

Gaming Realms creates and licenses innovative games for mobile, with operations in the UK, U.S. and Canada. Through its unique IP and brands, Gaming Realms is bringing together media, entertainment and gaming assets in new game formats.

This company issued a "significantly ahead of market expectations" update on 2 June 2020.

We get more of the same today;

Following on from the Group's trading update on 2 June 2020, the Company is pleased to announce that it has continued to trade ahead of market expectations... As a result of this, the Board expects revenue and EBITDA for the full year to 31 December 2020 to be materially ahead of current market expectations.

Revenues in H1 2020 (the "Period") were £5m (H1 2019: £3.1m) with adjusted EBITDA of approximately £1.2m (H1 2019: Loss of £0.1m).

If we double H1 EBITDA to annualise it (assuming H2 matches H1 performance), then we have annual adj EBITDA of £2.4m. Not bad, but bear in mind that the company capitalised development spend of £2.7m last year, therefore it's still operating at a small negative cashflow.

I've got balance sheet concerns too, the NTAV was about zero, and it's historically been a heavy cash burner. It's hoping to become cashflow positive in 2020. There's £1.5m in deferred consideration due to be paid in Dec 2020. Put that together, and I think an equity fundraising looks very likely. Not necessarily a problem though, as the share price has been very strong lately, and the market cap is now £62.9m. Therefore it could raise say £5-6m with only 10% dilution. Hence the weak balance sheet is not a deal-breaker for me.

Slingo - this software seems to be selling well;

The performance in the Period is a result of the expansion of our partners internationally and the release of new "Slingo" games, which have had increased take up by consumers.

I downloaded Slingo games onto my smartphone, and have noted on my pad: "Quite good, but mindless!". Nothing wrong with that, Kandy Krush fits the same description, and look how much money that made for investors, billions!

GMR's client list is where the interest lies. It is successfully licensing Slingo and other games to some big name gaming companies online.

My opinion - there's something interesting here, but I have no idea how to assess its future prospects, nor how to value it.

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Belvoir (LON:BLV)

Just to flag up a retail investor presentation - details here.

It seems an interesting share, and the company is trading well.

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All done for today! See you in the morning.

Best wishes, Paul.