Small Cap Value Report (14 Dec 2016 - Part 1) - BOO, LVD, PUB, VCP, TPG

14th Dec '16 by Paul Scott

44 comments 20023 reads

Good morning!

I'm back from my holiday, suitably refreshed. A big thanks to Graham for covering for me whilst I was away. It's worked so well, that we've asked Graham to join the editorial team. So he and I will be working together, to provide better coverage - 5 days per week, all year round (except bank holidays obviously) - and covering more companies too. Plus we'll be able to discuss each other's views too, giving additional thought on many stocks.

Please note that Graham and I are both writing today, so there will be 2 articles, marked Part 1 and Part 2. I will be covering BOO, LVD, VCP, and possibly more.

Graham is covering in Part 2 the following companies - IQE, IDOX, and BOOM.

Here is the link to Graham's article today.

Boohoo.Com (LON:BOO)

Share price: 118.25p
No. shares: 1,123.3m
Market cap: £1,328.3m

(I only hold a tiny, residual long position in BOO, having previously sold nearly all my shares)

Trading update & acquisition - it's a positive trading update. Key points;

Continuing to trade well
Revenue growth of between 38% and 42% in FY 17, against previous guidance of between 30% and 35%
EBITDA margin of between 11% and 12% in FY 17, against previous guidance of around 11%

Therefore, we should expect to see further increases in broker forecasts, continuing a pattern of increases - something you often see with very highly rated shares. It's so helpful when companies give specific numerical guidance like this, rather than generalised text waffle.

All companies should give specific guidance like this. Although I accept that it's easier for retailers, as the figures are easy to predict. Whereas businesses which rely on large contract wins will struggle to give reliable guidance.

Acquisition of PrettyLittleThing - it's good to see the uncertainty & conflict of interest here has been resolved. PLT is a competing company, set up & run by the son of BOO's CEO. It's been clear for a while that PLT is an exciting growth company in its own right. However, that obviously creates a conflict of interest - not a problem when BOO was a private company, but a very serious problem once BOO is a listed company. You can't have the CEO's son running a very similar business on the side. Hence…

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daveinthelakes

14th Dec '16

BOO

I understand the rationale behind keeping PLT management on board but have I got this right- BOO invest money in PLT and then give 1/3 of the increase in value thereby created, including presumably the capital introduced, to son? Sounds like the 21st century equivalent of a sinecure to me!

Paul may wish to ask if any capital introduced by BOO is excluded from the deal?

tom_

If you don't mind the question - why did you sell? I think you said you considered Boohoo.Com (LON:BOO) as your highest conviction hold? I'm guessing it'll be due to the valuation being too high now? I used to hold, but like you, sold out recently.

PhilipHanson

I think the £BOO update today was spectacular. Revenue growth significantly in advance of expectations (ironically as somewhat expected, especially by Peel Hunt whose research on BOO is worth getting hold of if you can) and improved margins too.

I like the PLT solution - it gets the full results consolidated in the group so we can see what's going on, but still allows the undoubtedly talented Kamani sons to be incentivised for continuing with their success. It's a golden goose problem to me - BOO management could have taken the short term greedy option and acquired 100% "on the cheap" for £5m. But my view is that it's a much more finely balanced question as to whether 100% of PLT without the Kamani's in five years time would be worth more than taking 66% now whilst keeping the Kamani sons interested and engaged in growing the business and then acquire the 34% at market value in 5 years time. Better to let the goose continue laying golden eggs rather than taking a knife to it IMO.

As regards forecasts, I still think they are very much living in the shadow of the Jan 2015 profit warning and will continue to under promise and over deliver. PLT revenues will surely grow more than 25% next year, as will BOO's revenue and profits as a whole. It's a firm hold for me, as it has been since around 40p.

A massive thanks to Paul for all his insight, research and, frankly, hard work.

Paul Scott

Hi sptmjdr,

Re Boohoo.Com (LON:BOO) you asked,

I sold BOO purely on valuation grounds, far too early, as it now transpires.

BOO is a fabulous company, but everything has a price, and I just thought the valuation was looking too full for me to continue holding. I freely admit to having sold too early, so obviously wish I'd continued to hold.

My background is very much as a value investor, so I find growth company investing very difficult, as it's going against the grain. The reason I've branched out into growth company investing, as well as value investing, is because growth companies is where the biggest gains are to be made - at the moment anyway.

Value investing is out of fashion at the moment, although as proven by Lavendon (LON:LVD) (and today Punch Taverns (LON:PUB) ) they can get exciting when they attract takeover bids.

Also, I think with BOO it's down to percentages. With the valuation now very high, what are the chances of BOO doubling again any time soon? Pretty slim, I'd say. Mind you, I thought that at 60p too, and it has very quickly doubled from there lol!

It's very difficult to predict what the market will do. So deciding when to sell is always the most difficult question of all, and it's not something I'm at all good at, I'm afraid.

Regards, Paul.

ccfragment

@ Paul: Welcome back and thanks for the efforts so far.

Any chance you could share the presentation you did last month on your thought process behind AVS and thus, potential takeover targets?

Thanks..

PJ0077

http://www.piworld.co.uk/mello/2016/11/22/mello-20th-november-2016-paul-scott-avesco-avs-presentation

doublelutz

Paul, I notice that Marshall Wace have a short on Boohoo. Coming down a bit but 0.69% of the share capital. My question is more general than Boohoo. Do you ever take much notice of short positions?

Fugwit

Re Boo
"Customer service is paramount, so they don't want to drive the top line so hard that support functions are overwhelmed."
Customer service and warehousing is already provided by Boo for PLT so that should not cause many integration issues. Seems sensible to provide "conservative" guidance for PLT, as management have learnt to do for Boo itself.

Hi AlanJenkins2,

I have a quick look at Tungsten (LON:TUNG) results today, but wasn't impressed. It's still all jam tomorrow. Whilst as things stand currently, the company is a long way from being viable. Although with the sale of the bank due to happen in a week's time, that should give it enough headroom on cash to survive for several more years.

There's lots of talk about improving performance, etc, but why pay up-front for a company which has performed so dismally in the past, in the hope that things are going to get better?

Also the amounts of invoices financed for early payment is absolutely tiny.

I'm not at all tempted to buy back into this one. Why waste time on over-hyped loss-making companies, in the hope that they might be able to turn a profit one day?

Regards, Paul.

kenobi

Welcome back, how was Abu Dhabi ?
Recomended as a winder sun destination ? is there much to do there ?
veg out ?
would it be good for kids ?

K

Hi doublelutz,

I review the list of most shorted stocks every few months, and if there's anything on there that I own then I'll sit up & take notice, and have a think about things.

I like to think about the bear case of every share I own. It's a very good discipline. Often you find that shorters are just latching on to a toppy valuation. Sometimes though, they find something seriously wrong with a company, so it's worth considering the opposite view quite carefully.

Regards, Paul.

RayStraw

Yes some shorts can show up the problems in a company, Globo would be a good example. They are not always right but they are worth looking into.

Michael Billingham

I have held Boohoo for 12 months now and do thank you repeatedly, Paul, for the initial lead..

I see that Panmure Gordon issued a research note this morning. They have raised, somewhat optimistically, their target price to 170p.

Do we have have another ASOS on the books?

clarea

Indeed a large market cap Ram however it was one Paul was keen on when it was involved in volatility 18 months ago that time he was a believer in the company and bought heavily and came out the right side of the trade, Interesting that he;s moved to the bear side since then,

Tanglands

Paul delighted you are back, hope you had a great break, and delighted that you have "allowed" Graham to enter your space, says a lot I believe. I know you welcome sensible polite challenge and debate so having the two of you comment and may be sometimes taking a different view or even the same, will be just fantastic. I have renewed for another three years so don't go away :)

melody9999

"I only hold a tiny, residual long position in BOO, having previously sold nearly all my shares"

Paul - think this is exactly what you did with ASC. Given your passion for BOO, I am a bit surprised .... so far I have resisted the temptation to cash out meaning it is my biggest holding now.. Good luck to all holders.

AlanJenkins2

Thanks,Paul.Cheers,Alan

WhaleHQ

15th Dec '16

Good to see you back Paul. Excellent insight :D

16th Dec '16

17th Dec '16

Paul - looked back at post 40 and it was a rubbish post by me. Sorry. There was genuine surprise that you had reduced your holding as you are so passionate about BOO .....but as you say it looks like I am crowing over this which was not the intention and is unnecessary. Please accept my apologies.

Small Cap Value Report (14 Dec 2016 - Part 1) - BOO, LVD, PUB, VCP, TPG

Boohoo.Com (LON:BOO)

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Paul Scott

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