Small Cap Value Report (12 Apr 2016) - FISH, UNG, SRT, LAKE, SAL

Tuesday, Apr 12 2016 by

Good morning!

I'll make this an earlier, but shorter report than usual, as I have a working lunch in London to discuss the future of stockbroking. So I'll be mainly listening, but chucking in a few points of my own which may not make me very popular - e.g. why do we need stockbrokers and market makers at all? All that's really needed is an electronic order book for every stock, with individual membership for investors within a central clearing house, to do all the admin.

Anyway, before I start WWIII over lunch, let's have a look at a few results & trading statements.

Spaceandpeople (LON:SAL)

Here is the latest in my series of CEO interviews. Yesterday I chatted to Matthew Bending, CEO of Spaceandpeople (LON:SAL) . I think his answers were very open, and interesting. See what you think - the audio is here.

Fishing Republic (LON:FISH)

Share price: 30p (down 6.3% today)
No. shares: 26.9m
Market cap: £8.1m

Results y/e 31 Dec 2015 - this is a small chain (7 shops in N.England) selling fishing tackle & equipment (55% of turnover), and a website (45% of turnover). It floated in Jun 2015, and this is given as a reason why profits barely increased - up from £295k in 2014 to £305k in 2015 on a pre-exceptional basis. £299k of exceptional costs took it down to a whisker above breakeven for calendar 2015.

As a retail roll-out, with online growth too, it looks superficially interesting. However, the glaring anomaly in the accounts is the extremely slow stock turn. In my retail days, we tried to turn (i.e. sell all, and replace with new) stock about every 6 weeks. In the case of FISH, its stock turn is more than a year!

So the P&L shows revenue of £4.1m, with a cost of sales of £2.2m. So the £2.2m figure is the stock (at cost) which was sold in the year. This figure is comparable with the stock at cost figure on the balance sheet, which should be no more than a quarter of that - i.e. c.£550k or below.

Stock on the balance sheet is actually a gigantic (in this context) £2.4m. That's bonkers! Basically this company is just buying warehouses & shops full of stock, which then sits there gathering…

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Fishing Republic plc is a fishing tackle retailer in the United Kingdom. The Company's principal activities are the retailing, production and wholesaling of fishing equipment. The Company operates through the segment, being that of the retail of fishing tackle and equipment. It operates from a chain of retail outlets principally located in the North of England and online. It caters for various types of the anglers, such as coarse, carp, game and sea fishing, and supplies a range of products, including brands. It also offers consumables, such as bait, lines and hooks; clothing, and luggage products. The Company's product offerings include a range of own-brand ranges, such as Klobba for clothing and Theseus for carp fishing products. Its stores are located in Barnsley, Doncaster, Hull, Manchester, Rotherham, Sheffield and Sunderland. Its subsidiaries include Fishing Republic Trading Limited and Fishing Republic Retail Limited, which are engaged in the retail of fishing equipment. more »

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Universe Group plc is a United Kingdom-based company, which designs, develops and supports point of sale, payment and online loyalty solutions and systems for the United Kingdom petrol forecourt and convenience store markets. The Company's solutions are delivered through the cloud into real-time environments. The Company's trading segment is HTEC Solutions (Solutions). Solutions provide hardware, software and service solutions into the United Kingdom petrol and retail markets. The Company provides services, such as deployment, including site surveys, and communications infrastructure design and installation, and equipment refurbishment and disposal; field maintenance, including a range of on-site maintenance options; in-house services, including bench repair facility and help desk services, and outsourcing, such as project management, installation engineers and infrastructure consultants. The Company's subsidiaries include HTEC Group Ltd, HTEC Ltd and Indigo Retail Holdings Ltd. more »

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SRT Marine Systems plc, formerly Software Radio Technology plc, is engaged in the marine technology business. The Company's principal activity includes development and supply of automatic identification system (AIS)-based maritime domain awareness technologies, and derivative product and system solutions for use in a range of maritime applications from safety and security to fishery management and environment protection. AIS is a mesh network radio communications system technology specifically designed for the marine domain, and it uses a combination of global positioning system (GPS) and high frequency radio to enable real time, simultaneous data communication between multiple, independent entities providing information, such as identity, GPS position, speed and other customized data. It offers a range of AIS products and maritime domain monitoring system solutions, which also fuse other maritime sensor technologies, such as radar, closed-circuit television and communications. more »

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  Is LON:FISH fundamentally strong or weak? Find out More »

33 Comments on this Article show/hide all

browndav 12th Apr '16 14 of 33

I am interested in whether has any views on Access Intelligence who announced their Preliminary Results yesterday

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xxx 12th Apr '16 15 of 33


I think that there are 4 main issues to consider carefully:
Advice or execution only, costs + commissions, their range of markets and probity.

I use a few.  I would avoid  selftrade as their platform and admin is poor quality. As for Killik + co, I found them untrustworthy, they  tried to change [raise] the commission rate, whilst I was actually trying to deal, leading to an FSA investigation [where they couldnt/ wouldnt play the recordings as they said they were lost !]

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kalkanite 12th Apr '16 This post is under review


I do not think investors have quite grasped what the $100m signed agreement means to SRT. The company is currently on enough turnover to keep it roughly around breakeven. The new MDM project is not currently part of next year’s forecast.

SRTs average profit margin is circa 51%, to be on the safe side as they may have given some concessions for such a large project I will assume that it is 33%.

Thirty three percent of $100m is $33m, which equates to £21.04m over 3 years. Keeping it simple that is £7m/year for the next 3 years.

With 127,512,419 shares in SRT that equates to an EPS of around 5.5p/year for the next 3 years (remember the company already breaks even and contracts out the fitting of their equipment so there will be very little extra spend required to execute this project. So this implies a forward PER of just 6.2 on the current price of 34p. I would put a PER value of between 12 & 15 on this company which would give an expected price of between 62 & 82.5p / share in 12 to 18 months’ time.

If SRT can nail another MDM project of say $50m over the next 18 months then this will really move the price.

The above does not include their deal with exact Earth, which could reap in recurring revenues. For each boat that is required to be satellite identifier able (this would need to be mandated for boats to sign up) each boat will pay $10/month, SRT will get 33% of revenue for each of their Class B AIS devices. In addition, their new devices are Wi-Fi enabled which could possibly bring in more revenue if boat owners sign up to this.

It is not without risk, a worldwide recession may delay this and SRT need to execute this project. My fear is the company is bought out on the cheap before all this is reflected in the share price.


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mwjackson 12th Apr '16 17 of 33

In reply to post #127394

I concur avoid Selftrade, I moved off them last year, customer service is a joke.

Currently using happily. Maybe not the cheapest but customer service has been good.

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shanklin100 12th Apr '16 18 of 33

Presumably the author (in the other place) meant 3:7:90, not 3:70:90, in terms of the relative magnitudes of the various phases of the recently won SRT contract?

Cheers, Martin

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Ramridge 12th Apr '16 19 of 33

Hi kalkanite
Re. Software Radio Technology (LON:SRT) I think your numbers are a tad optimistic. Your argument is that the gross profit of around 50% flows straight into the bottom line. That assumes no additional operational & admin costs or third party costs or taxation.
Hmmm. I cannot think of a company that has accomplished this. Not even Microsoft.
Regards, Ram

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Laughton 12th Apr '16 20 of 33

Re Spaceandpeople (LON:SAL) Thanks very much for the interview link Paul. All sounding pretty positive, certainly better than on the recent online results presentation.

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kalkanite 12th Apr '16 21 of 33

Hi Ram, you are indeed correct about the tax. As for other overheads, the profit margin is the supply to third party installer's, so there are very little overheads. I quickly did the calculations while at work and wondered why they differed to what I had previously done! School boy error there :-)

Edit.... For some reason I cannot edit the comment above :-(

2nd edit ... I've reported my comment as misinformation until I can edit the post

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smallcapman 12th Apr '16 22 of 33

In reply to post #127400

Hi Kalkanite,

Yes, we were already expecting a heavy weighting to the third year, as that's when the actual rollout takes place. However, I'm not clear if the contract can be aborted if the customer doesn't approve phase 1 or 2.


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Stegrego 12th Apr '16 23 of 33

FISH I seem to vaguely recall something about rents on the shops being a bit suspect ie realty low, but due to rise dramatically over next few years.

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JohnEustace 12th Apr '16 24 of 33

Re FISH, I'm not sure it's fair to compare their stock turns with High Street fashion. Not all businesses can or need to turn stocks like that. You need to look at the whole supply chain - for a product line like theirs someone will have to hold the stock. If they can amalgamate separate stock holdings as they acquire businesses and then centrally manage and reduce the stock they have a great opportunity to generate cash and make the combined business more than the sum of the parts.
I know a privately held business that holds a year plus of stock. Their competitive strength is having the part when the customer wants it. They are not items that go quickly out of fashion. Despite what you could regard as terrible cash utilisation, the owner is wealthy and happy.

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andrewdb 12th Apr '16 25 of 33

The auditors are meant to review stock on a line-by-line basis, and insist on the client making a provision against slow-moving stock. Has that happened here? I'm sceptical that it's been done properly.

Reading this made we wonder how Auditors value software - your codebase's value must depreciate over time if just left to itself

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jonesj 12th Apr '16 26 of 33

Apparently Singapore has a central electronic repository where you hold your shares directly.
It's therefore possible to buy with one broker and sell via another.

Introducing such a system here would be a very good start. It would eliminate the nominee system, which ties people into buying and selling with the same broker.
The next step would be to allow people to place trades directly. I'm sure market makers have a role, but if we're prepared to be flexible on lot sizes and timing, I see no reason why we need them for every trade.

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cig 12th Apr '16 27 of 33

In reply to post #127448

The nominee system is not incompatible with portability, some countries have both (e.g. US, Germany, etc). The key is to have the regulator/legislator mandate free (cheap) portability between brokers, as it's unlikely the industry will volunteer implementing that feature of their own accord.

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drvodkaquickstep 12th Apr '16 28 of 33

In reply to post #127439

I understand from discussions with management that stock turn is a regular source of questioning. The simple fact is that there is a massive array of fishing tackle and consumables on the market from low cost items such as hooks (which come in a huge ranges of sizes, pre-tied or not, hair rigs or not, barbless / micro barb / no barb - the list is endless just for hooks alone) all the way through to rods, bivvies, bite alarms and the like. I cannot think of another type of sport that requires (or offers) such a huge range of gear and this is multiplied up further when applied to coarse, game, specialist / carp and sea fishing.

Anglers want choice and they want the latest gear on offer in the market, if they cannot get it from Shop X they will simply buy it from Shop Y. Hence the 16-18,000 product lines held by FISH which is a competitive advantage.

As John says, items such as lead weights are not going to go out of fashion and hence the turn does not need to be as quick as other forms of retailing. I understand that even when stock is dated or perhaps becoming obsolete it is just discounted and sold off and very rarely at cost or a loss as FISH have good margins due to the scale that they purchase at.

All of that said, it clearly is a consideration and is something that has cropped up in discussions I have had with other investors. If you look at their competitors such as Glasgow Angling Centre, their stock levels were GBP 2.5m in 2015 and GBP 2m in 2014 so of a similar magnitude although as FISH have noted, their current high stock levels include for stocking of the new stores.

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Paul Scott 12th Apr '16 29 of 33

In reply to post #127388

Access Intelligence - yes I looked at their figures. Didn't report on them, because they looked rubbish. You asked!

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gus 1065 13th Apr '16 30 of 33

Morning Paul.

Wondered if you had any views on LON:SPD (Sports Direct's) investment of £108m in a new flagship HQ and retail outfit in Oxford Street announced yesterday. Quite a large chunk of cash and will need to shift a lot of training shoes and replica football kit to pay for it. A vanity purchase or a sound investment in prime London real estate?

Also, hope to see some comment in today's SCVR on Telford Homes (LON:TEF) and today's pre-results announcement. Quite a bullish "slightly ahead" statement and interesting comment on the state of fringe London B2L market and resi property in general.


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browndav 13th Apr '16 31 of 33

Thanks for your reply re Access Intelligence. Share Profits yesterday wrote an article suggesting to be patient as these may be cash generative next year. I have held since 2006 & only show a 19% PROFIT. May sell half.

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mattafc 15th Apr '16 32 of 33

In reply to post #127385

As much as I do not trust those currently on the board after previous events I cannot objectively look at this stock and see anything else than it being undervalued.

£LAKE Market Cap = £72.5m with a forecast net profit of £19.9m. The last issued balance sheet shows positive cash and positive NCAV. Latest update tells us that half of banking facilities currently available (total facility =£50m) without giving specific feedback about changes in Net Cash position which is a concern.

We have had 2 updates telling us that results are on track to deliver forecasts which would put the PER at around 3.6x. The question for me is what ratio would you value the business at (assuming balance sheet remains roughly as it is) and what margin this gives you for results to miss forecast.

Let's say a reasonable PER rating would be 8 given all the boardroom turmoil and distrust that exists. That would give a margin of 53% in which estimates could be missed for the PER to maintain an 8x rating. Given that there have been 2 on track updates, the second of which within 5 weeks of the interims being released, and significantly for me almost 2 weeks after the trading period had ended. Lets not forget this is only a £72.5m sized company. In a company of that size both the CEO and FD should be well in touch with the performance of the business almost on a daily basis. To deliver an on track update after the period has closed and then to significantly miss to me would equate to delivering a 'false or misleading statement' and therefore a criminal offence which the FCA would have to review.

There's also interesting insight into the Slater investment case through Mark Slater's interview with Stockopedia here Mark describes what happens when there is a massive profit warning 'Sometimes you don’t want to get out because the price is too low and sometimes you think it can be fixed. Those are the situations where you then engage and become potentially much more active' Sounds very much like Lakehouse (LON:LAKE) and gives confidence that the Slater fund see's too much value here to just walk away.

Overall, I don't think the forecast will be delivered, but I do think there's enough margin of safety around the forecasts to make this share worth the risk with another profit warning already seemingly priced in. The board level wrangling will be resolved and underneath it there is a profitable business that will not continue to trade on these ratios. Either profit levels will drop, or the share price will rise. I currently hold a long position DYOR

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drvodkaquickstep 26th Apr '16 33 of 33

Please to see that Fishing Republic (LON:FISH) will be presenting at the ShareSoc event in Brighton on May 10th. - currently only AVAP shown on the flier....

I like the management and believe they have a great opportunity to consolidate the retail market. CEO appears honest and hard working and Chairman is ex. Dignity hence bringing necessary experience to the Board of 'buy and build'. A micro-cap company however with a lot to prove to investors although to-date I am pleased with progress and those that bought at IPO or anytime during 2015 will have seen the market waking up to the potential. 

Miton (Gervais Williams) are major holder. 

Currently trading in-line and forecast is t/o of GBP 6.5m and EPS of 1.9p. Current valuation looks up with events.

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 Are LON:FISH's fundamentals sound as an investment? Find out More »

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 on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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