Small Cap Value Report (Mon 8 Feb 2021) - OTB, FCCN, BOO, LOOP, UPGS, TRX

Good morning, it’s Paul & Jack here with the SCVR for Monday.

Timing - TBC

Agenda -

On The Beach (LON:OTB) - Trading Update - from Friday last week, which I looked at over the weekend.

French Connection (LON:FCCN) (I hold) - Mike Ashley ( Frasers (LON:FRAS) ) dumps his entire 25% stake - who's bought it then? We don't know yet.

Boohoo (LON:BOO) (I hold) - confirms that it is buying Arcadia brands Wallis, Dorothy Perkins, and Burton out of administration, with completion of the deal set for tomorrow, 9 Feb 2021.

Loopup (LON:LOOP) (I hold) - in line trading update, but a big deterioration in H2 vs H1

Up Global Sourcing Holdings (LON:UPGS) - another strong trading update

Contribution from Jack :

Tissue Regenix (LON:TRX) - Trading update for FY 12/2020

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Mello Monday tonight

The popular investor evening on Zoom is back.

I’ve been roped in to comment on the BASH session at the end, to give Jack a break!

One of the companies presenting is Scs (LON:SCS) (I hold) so I’m looking forward to that one. It’s a boring value share, but looks well set to resume paying good divis in future, in my view. So I think this could be one for readers to consider researching, as a long-term income share, e.g. for SIPPs in drawdown. The share price never seems to go anywhere much, so probably not of interest to people who like to trade in & out of things. Anyway, see what you think of management this evening.

David Hornsby of Ideagen (LON:IDEA) is retiring soon apparently. Investors that backed him following his first Mello presentation would now be 25 times the richer, and he's entertained us along the way too! What next? David will hopefully share his thoughts on the next entrepreneurial journey with Mello viewers and also reveal how he sets about delivering amazing returns for investors.

You can see the full programme and recordings of some previous shows here

https://melloevents.com/mellomonday-8th-february-2021/

Discount code for Stockopedia subscribers: MMStocko21

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On The Beach (LON:OTB)

355p - mkt cap £559m

Trading Update

On the Beach Group plc (LSE: OTB.L), the UK's leading online retailer for beach holidays, today issues the following trading update for the four months to 31 January 2021

This sounds very negative -

… consumer demand for forward holidays has remained very weak with UK traffic, bookings and spend on online marketing activity across the first four months of the financial year down 73%, 83% and 85% respectively.

Rather confusing wording there, I couldn’t work out why they only give 3 figures, for 4 months. Then I realised what they’re trying to say is this -

Traffic (website?) down 73%
Bookings down 83%
Online marketing activity down 85%

That sounds awful. I thought that the public were booking up holidays in their droves, in anticipation of the lifting of restrictions? OTB isn’t seeing that, at all. Quite the opposite.

Outlook -

We expect booking demand to remain weak until these restrictions are lifted and vaccine deployment is more widespread, both in the UK and our major travel destinations, which will impact H1 and full year performance…

the Board believes that booking volumes will remain weak through H1 and into H2. Following the prudent activities undertaken in the last financial year, the Group remains in a strong and debt-free financial position.

No guidance provided, due to market uncertainties.

Cash position - £39m as at 31 Jan 2021.

Undrawn £75m bank facility.

Monthly cash burn (at zero revenues) is £2m

Therefore liquidity sounds fine - it could tread water for a long time in current conditions.

My opinion - I’m quite shocked by this, as it seems completely at odds with the positive recent update from Saga (LON:SAGA) (I hold), which indicated strong retention (of customer bookings happy to defer their cruise rather than cancel), and strong pent-up demand, e.g.

Saga said -

Customer retention across both businesses remains high; the average proportion of Cruise guests who have re-booked rather than take a refund stands at an average of 69% through the travel suspension period, but rose to 86% more recently, showing the pent up demand for Cruise amongst our guests who will benefit from the first round of the vaccine roll out.

Customer demand has also been very resilient, with £140m of total Cruise bookings as at 23 January, representing 68% and 28% of the latest revenue targets for 2021/22 and 2022/23 respectively.

[Saga trading update, 26 Jan 2021]

That seems completely at odds with OTB saying demand has almost completely dried up for their package holidays website.

My opinion - from what I can make out, it sounds like the over-50s are eager to get on cruise ships again, but people generally don’t seem to be booking beach holidays (yet).

I’ve just visited OnTheBeach website, and put in some random dates in August, and November 2021 for holiday bookings, and the only place that comes up is Cape Verde. That’s it, nothing else. So it seems as if the website is basically shut down, or on hold almost completely at the moment.

It’s only burning £2m per month, which is nothing really, given that it has £39m cash in the bank. Therefore, does it really matter when holiday demand returns? If it’s another 6 months, which seems pessimistic to me, then £12m cash would be burned over that period, making a dent in the £39m cash pile, but not really material to the £559m market cap.

If the share price recovers to pre-covid levels, then 500p might be on the cards again. Although with every company we need to check that the share count hasn’t gone up in the last year. In this case, the share count has risen, by about 20%, in a placing at 257.5p in May 2020. Therefore the share price may not necessarily regain the 500p level on the chart, given that would equate to a 20% higher market cap than before covid. I wonder if some people might buy the shares without realising that? We are in a bull market after all, and people sometimes don’t check the small print in markets like this, and end up inadvertently over-paying. Always double-check the share count!

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Overall I can’t get excited about OTB, with so much upside already priced-in. I think there’s possibly better upside on my existing position in SAGA.

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French Connection (LON:FCCN)

(I hold)

25.7p - mkt cap £24.8m

The reason for an unusual rise in share price last Thursday was revealed on Friday, when the company admitted it had received two possible bid approaches from named investment firms - see Friday's SCVR.

The shares were held mainly by two key investors - the founder, Stephen Marks, holds 41.5%, and Mike Ashley's Frasers (LON:FRAS) held 24.9%. Therefore any bid approaches would we a done deal if both agreed on the terms.

Things have been mixed up a bit this morning, with an announcement that Frasers has sold its entire stake, and did so on Thursday 4 Feb 2021, last week. It's not a big surprise, as they had been dribbling out bits previously. Although that the whole lot has been sold is quite a surprise.

It remains to be seen which party or parties has bought this stake. I noted an extraordinary volume of trades in this micro cap last week, It will certainly be interesting to see how this pans out.

I've been highlighting the sum-of-the-parts value here, and the likelihood that the 75-year old founder would eventually sell, since before the dawn of time, it feels like! Still it's nice to see a plan come together. I hope a few readers hung on here, and recouped previous losses. Or even made some money, if you bought near the lows in March 2020, which amazingly were about 4p at one point I think.

Let's see what happens. I'm guessing we'll have more Holding in Company RNSs this week, given that the second largest shareholder has sold out. Rightly or wrongly, I'm sitting tight for now, and haven't sold any. If it keeps rising, I might be tempted to top-slice, as it's already getting a bit toppy in terms of portfolio weighting, hence am keeping my options open. So please bear in mind that my opinions expressed here are at this particular point in time, and subject to change as the situation develops. I'll keep you posted though, and obviously as always, please make up your own minds.

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Boohoo (LON:BOO)

(I hold)

365p - mkt cap £4.6bn

Acquisition of Dorothy Perkins, Wallis & Burton

boohoo, a leading online fashion retailer, is pleased to announce that it has agreed to acquire all of the e-commerce and digital assets and associated intellectual property rights, including customer data, related business information and inventory of the Burton, Dorothy Perkins and Wallis brands ("the Brands") from the joint administrators of Arcadia Group Limited (in administration) and its relevant subsidiaries ("the Transaction"). boohoo will pay £25.2 million in cash, funded from existing cash resources, on completion.

I don't think the stock market has yet grasped how significant this deal, and the acquisition of Debenhams are going to be for BOO. It greatly expands the group's demographics, and should see a step-change in scale of the group once these new brands are absorbed into the BooHoo machine.

Therefore, over time, I reckon we should see large increases in forecast revenues & profits.

Remember that these brands were already trading online, with a big customer base. In the case of Debenhams, the annual online revenues were about £400m, or £300m if we take off click & collect in-store. Put that on BOO's usual 10% EBITDA margin, and it's a potentially £30m boost to profits. Add onto that the growth that BOO's expertise in product & marketing should bring over time, and the £55m acquisition price for DEB could end up looking a remarkable bargain.

Ditto with the 3 additional brands acquired today. At the end of today's announcement, it refers to revenues of £178.8m for the "continuing businesses" for FY 08/2020. Presumably that means online sales, as that's the continuing business. {Edit: also wholesaling, as today's Zeus note points out]

That's equivalent to an additional 14% revenues on BooHoo group's £1,235m revenues for its FY 02/2020. Add that on to the c.£300m additional revenues bought in from DEB, and we're looking at £479m of additional, annual revenues bought in. That's assuming under BooHoo ownership the 4 new brands just match historic online revenues. In practise, I suggest they'll be aiming to grow the historic revenues, aggressively.

Once all this starts to feed into analyst forecasts, I think we could see a big re-rating of the shares, to reflect a much faster growth rate.

Online sales tax - this is a potential negative for all online retailers. Press reports suggest that the Govt might be succumbing to muddle-headed thinking, that online retailers have a cost advantage by not paying much in business rates.

This is complete nonsense, since it isolates just one cost, whilst ignoring other differences in business models. Online retailers do pay less business rates, yes. However, they pay about the same amount (c.8% of sales) in online marketing costs that physical retailers pay in rent+rates. Physical retailers have the customers come to them - which they pay rent & rates for. Online retailers have to fund substantial online marketing costs, to draw customers to their websites. It's directly equivalent. One a physical shopfront with heavy costs, the other a virtual shopfront, also with heavy costs to attract customers.

Also, online retailers have to fund 40-50% customer returns (two lots of packing, handling & postage costs, and all the logistics involved), whereas physical retailers enjoy a sub 10% returns rate.

When you compare the two business models in their entirety, online retailers don't have a cost advantage at all. That's why so few online retailers actually make a decent profit! Let's hope the online retailers explain this point to the Govt. The fact is that any additional taxes on online sales would just be passed on to customers.

What High Streets need more than anything, is more flexible leases, so that rental costs can fall when times are hard. That's what is driving the High Street out of business, on top of covid lockdowns. Ultimately customers vote with their feet - people want to buy more stuff online, which inevitably means there's less market share for physical retailers. I can't see the point in Govt action to attempt to stand in the way of this tide. We need fewer physical retailers, to match reduced demand. It's not rocket science!

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Loopup (LON:LOOP)

(I hold)

78p (up 1%, at 09:34) - mkt cap £44m

Trading Update

LoopUp Group plc (AIM: LOOP), the cloud platform for premium external communications, is pleased to provide the following trading update.

No change from previous guidance, by the looks of it -

In line with the trading statement of 27 November 2020, the Group can now confirm that it expects revenue for year ended 31 December 2020 to be approximately £50.2 million (FY2019: £42.5 million) and EBITDA to be approximately £15.3 million (FY2019: £6.4 million).

I really dislike it when companies report EBITDA, as that forces me to check the last accounts to see how much they’re capitalising into intangibles, to find out what real profits are.

Looking back at H1, it made £12.2m adj EBITDA, which turned into £9.2m adj operating profit. So there’s £3.0m per half year, in depreciation & amortisation of capitalised development costs, which to my mind renders EBITDA meaningless.

Also note that in H1 capitalised development spend of £3.2m exceeded amortisation of development spend of £2.2m, so this accounting treatment is certainly flattering reported profits above what I see as real-world cash profits.

What I don’t really understand, is why LOOP had such a spectacularly good H1, then went backwards significantly in H2? This is why the share price soared, then crashed last year, unfortunately taking some of my money with it (my avg buy price of 158p after excellent H1 trading updates, is looking sickly now, with a 51% running loss).

Here is the split this year, using figures I've compiled from today’s TU and the interim results:

As you can see, that’s a fabulous H1, then a relatively poor H2. Operational gearing plays its part there, working in reverse.

Liquidity - looks fine, with net debt of £0.7m, down dramatically from £11.5m a year earlier, although nothing is said about whether any creditors have been stretched, so without that information we can’t rely on the net debt figure being reliable as a long-term position.

Diary date - 23 March 2021, for FY 12/2021 results.

My opinion - I feel in the dark here, not really knowing what is driving these gyrations in business performance. Clearly LOOP had a spectacularly good lockdown 1, but a significant number of users must have then decided to use an alternative product in H2 - Teams, or Zoom, maybe?

The idea with LOOP is that it’s a high-end, secure system, which is why firms of solicitors & accountants are prepared to pay a lot to use it. Maybe investors should talk to any contacts we have in that space, to anecdotally get a handle on what's going on? That might give a clearer view than what LOOP tells us, possibly?

Management made a big song & dance last year about their telephony add-on for Microsoft Teams being terrifically exciting. They don't say anything about that today.

For me the big question is whether it’s a busted flush, and I should sell up and move on? On balance, with the market cap only £44m, and net debt eliminated (hence should be no insolvency risk) and an easily variable cost base (mostly people), then I’m going to stick with it & see what happens. It’s less than 1% of my portfolio, so not a big deal either way. Also, last year when I sold out in despair, it 4-bagged within about 3 months! So it seems to just be one of those unlucky shares, where doing the opposite of what I do, would be highly profitable. You can't let these things get to you, it goes with the territory sometimes.

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Up Global Sourcing Holdings (LON:UPGS)

140p (up 4%, at 11:48) - mkt cap £115m

Trading Update

Ultimate Products, the owner, manager, designer and developer of an extensive range of value-focused consumer goods brands, announces the following trading update for the six months ended 31 January 2021 ("the period").

This looks good -

• H1 revenues up 11.4% to £75.4m
• Online & supermarket channels doing particularly well
• Beldray brand is stand-out performer, and other homewares popular
• Net debt almost eliminated now, at £(1.5)m
• Plenty of liquidity headroom, at £25.5m

Outlook for FY 07/2021 -

• Continuing momentum in order book
• FY will be ahead of current expectations
• Higher shipping costs from China mentioned, but seems to be baked into the revised guidance, the way I’m reading it

Revised guidance for FY 07/2021 -

While the Group is currently seeing an increase in shipping rates ahead of the start of the Chinese New Year on 12 February (in common with all businesses that source product from China), the Board nevertheless currently expects that underlying EBITDA for FY21 will be in excess of £12.6m (FY20: £10.4m) with underlying PBT in excess of £10.3m (FY20: £8.2m).

I was about to go off on one, about EBITDA again, but they kindly included my preferred measure of underlying PBT also, so I can calm down again!

Adj EPS would have been a helpful disclosure.

Research update - from Equity Development, forecasts 10.1p adj EPS this year, up from 7.9p last year. At 140p per share, the PER is 13.9 - that looks decent value to me. Assuming that this increased level of profits is sustainable, and not a one-off boost from people having less to spend their money on during lockdown?

Dividend - the forecast divi of 5.1p gives a yield of 3.6% - healthy, when interest rates are low.

Diary date - 30 April 2021 for FY 07/2021 results publication.

Balance sheet - looks fine, no issues here.

My opinion - a very nice company, performing well, and repeatedly issuing positive updates. Hence I can see why UPGS shareholders would be happy with progress.

Very high StockRank gives us nice confirmation of my positive view -

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Jack’s section

Tissue Regenix (LON:TRX)

Share price: 0.67p (-10.6%)

Shares in issue: 7,033,077,499

Market cap: £47m

(I hold)

Tissue Regenix (LON:TRX) is a medical technology company spun out of Leeds University in 2006. It focuses on regenerative products based on its two platform technologies (dCell and BioRinse). The tech is to do with providing organic donor scaffolds for wound care (as well as other things), but, crucially, it strips these scaffolds of foreign DNA and cellular materials so that the patient’s body can build on them.

It’s not as complicated as I probably just made it sound. Here’s a two minute video about dCell in particular, which is used in both the group’s Orthopaedics and Biosurgery divisions.

TRX has been on quite a journey as a listed company - one that will immediately turn off more risk averse investors. The share price chart below should give a sense of the risks.

To recap:

• TRX IPOd at multiples of the current share price despite having far less revenue, based purely on the commercial potential of its technology,
• It then generated years of substantial net losses as it developed its medical products,

• It has had to repeatedly tap shareholders for cash,

• At the same time, its share price has been dragged down by the Neil Woodford saga.

The company is forecast to continue making losses, but its price/sales valuation has never been better and TRX does still have great products directed at big markets (the Global Regenerative Medicine Market is expected to be worth $81bn by 2023).

Revenue has been increasing (albeit that trend has been hit by Covid), and the company recently raised c£9m of cash.

A lot of lessons have been learnt over the past few years, so you are essentially paying a lot less for a lot more revenue, and a management team more focused on commercialising its portfolio, with a share price that has been depressed by a distressed large seller.

It’s far from a slam dunk and is still very risky, hence a small holding only, but the risk:reward here is better than it has been in years. The shares have been strong in recent weeks though, possibly too strong, and being down c10% today isn’t too surprising.

Trading update for the year ended 31 December 2020

Total revenue of £12.8m is in line with revised guidance. There’s a strong cash position now of £9.5m following the fundraise in June 2020. But it’s important to note that TRX is still loss-making and has been so for many years.

However there are signs of growth capex and a more commercial mindset, with TRX’s capacity expansion project in San Antonio on schedule and ‘additional commercial partnerships and product launches undertaken’.

Phase 1 of the San Antonio build out began in July 2020 and remains on schedule to come onstream during H1 2021. This will allow for a c.50% increase in the BioRinse® (CellRight) processing capacity, as well as allowing improvements in the Dermis and Amnion throughput.

In the meantime, steady revenue is a fairly good result in an industry where many companies experienced a downturn in demand as hospital resources were redirected and many elective surgical procedures were postponed.

TRX is observing a slight uptick in the recommencement of these procedures, ‘however, it remains difficult to predict at what pace a return to pre-pandemic procedure levels will occur.’

There will be further cost-cutting - a restructuring of the US business is expected to reduce the overhead cost base by some c.$700k on an annualised basis. Additionally, the group’s UK manufacturing operations have been relocated to smaller premises in Garforth, ‘with many aspects of the OrthoPure® XT production process successfully outsourced’. This new facility should become operational in Q1 of this year and will contribute a further £400k in annualised overhead cost savings.

It makes you wonder how this group’s cost base has been managed in the past, but on the plus side, that makes for around £1m in annualised savings to be achieved by the end of 2021.

Conclusion

Having followed this company for a few years (as a Leeds uni spin out), there does seem to be a shift in management language towards a more commercial mindset. That, along with a much reduced market cap, makes it worth a look.

In May, a white label manufacturing agreement was concluded with a top 10 global healthcare company for the launch of a new soft tissue orthopaedic product. Sales traction here is anticipated to increase throughout 2021 as levels of procedures begin to normalise.

There have been additional, smaller white label agreements as well, but there is still that key assumption of ‘normalisation’ to bear in mind.

And TRX remains a heavily loss-making medical tech stock that has consistently diluted shareholders in the past. As such, profit-taking on a strong recent share price is not too surprising and it is quite possible that at 75p, TRX was getting ahead of itself.

I’m happy to let this one run and give the management team a chance to execute. The board and executive management team have undergone a number of changes in recent months and the company is well capitalised to invest in growth and capacity expansion.

It’s still very high risk and has it all to prove, hence the small, speculative holding. That makes the volatility far easier to handle.