Small Cap Value Report (18 Aug) - SYS1, MMC

Friday, Aug 18 2017 by

Good morning!

The only RNS announcements which look reportable to me are SYS1 and Management Consulting (LON:MMC). But perhaps one or two others will crop up.




  • Share price: 637.5p (-23%)
  • No. of shares: 12.4 million
  • Market cap: £79 million

Trading Update

It's one of the worst days I've seen here in terms of share price value destruction, so bad luck to those holding it.

I've been watching this market research firm multi-bag over the last couple of years, and it has been a while since I thought it was good value (though I always considered it high-quality).

The problem is the lack of good earnings visibility: most money coming in the door has been to do with ad hoc projects. That implies forecasting results will be difficult, and  that should be compensated by a lower valuation (vs. companies which can get more of their customers signed up for long-term contracts).

As the CFO said in the final results statement in June:

..our business still remains predominantly Ad Hoc, with limited revenue visibility, and as always we need to acknowledge that we cannot predict with very much certainty how revenue growth will unfold over the coming financial year.  Trading during Q1 of our new financial year has been a little slower than we expected, but we remain confident of making further progress over the year as a whole.

Which brings us to today's update:

The slower than expected start to our financial year... has continued since then, and we now expect H1 Gross Profit (our main top line performance indicator) to be 6-11% lower than prior year.  This is mainly due to non-recurrence of large one-off Innovation projects as a result of some significant client spending deferrals and a more competitive market, although there have been some more encouraging signs recently.

The "more competitive market" is the most worrying element to this. I've been under the impression that System1 (AKA "Brainjuicer" in old money) has a completely fresh approach to Ad Testing/Brand Tracking, but this makes it sound like the competition is catching up perhaps.

In addition to lower gross profits in H1, costs are set to rise by 15% (or by 10% for the entire financial year), due to some new senior hires and some severance packages.

Updated guidance is…

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All my own views. I am not regulated by the FSA. No advice.

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System1 Group PLC, formerly BrainJuicer Group PLC, is a United Kingdom-based company, which is focused on marketing and brand consultancy, with proprietary market research and advertising solutions grounded in the principles of behavioural science. The Company’s services include System1 Agency and System1 Research. System1 Agency is advertising agency, that creates advertising proven to translate emotion into profitable brand growth. System1 Research produces the FeelMore50, an annual ranking of the world’s 50 TV and digital ads. The Company offers its client create 5-Star, fame-building communications. The Company operates in the United Kingdom, the United States, Continental Europe, Brazil, China and Singapore. more »

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Management Consulting Group PLC is a United Kingdom-based company engaged in the provision of professional services. The Company operates in two segments: Alexander Proudfoot and Kurt Salmon. Alexander Proudfoot delivers financial benefits to its clients by developing and installing processes and programs. Alexander Proudfoot offers its services in a range of sectors, including natural resources, industrials and utilities, financials, healthcare and retail. Alexander Proudfoot serves clients in South Africa and across sub-Saharan Africa in the natural resources, financial services and manufacturing sectors. Kurt Salmon is a consultancy providing advisory services to both the private and public sectors covering strategy, transaction services, operational performance and transformation management. Kurt Salmon operates internationally in the retail and consumer goods sector, and in the healthcare sector in the United States. It operates in the Americas, Europe and the Rest of the World. more »

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  Is System1 fundamentally strong or weak? Find out More »

18 Comments on this Article show/hide all

Camtab 18th Aug '17 1 of 18

I think it is SYS1 Graham. The old brainjuicer.

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bestace 18th Aug '17 2 of 18

I struggle with SYS1 as an investment. Partly that's because I have a cynical view of the marketing-industrial complex as existing to induce people to buy stuff they don't need or want, often with money they don't have, but also in the specific case of SYS1 it's because I think the world would be a better place if everyone took more of a system 2 based approach to their buying decisions.

I also struggle to see where they have a competitive edge. In their 2014 accounts they said this:

We will continue to build what some call the moat, or competitive advantage, protecting our business... The more we hone our techniques and expand their applicability, the more difficult they will be to replicate.

By the time of their 2017 accounts they were making comments like this:

In the UK, our second largest market, gross profit declined by 5% due to market competitiveness and sharp declines in two large clients for specific reasons associated with those two clients
The key risk to long-term value creation is competitive pressure leading to lack of take-up of our services by large clients in favour of alternative providers. Our competitors are very much larger than us with access to significantly greater resources. Furthermore, we do not have overt technological barriers preventing competitors from encroaching into our space.

And in today's release they are attributing lower gross profit partly to "a more competitive market".

If the big boys in their industry are latching on to the benefits that 'system 1' based marketing can bring, it seems to me that being first to the party may not be enough for SYS1 to thrive in the long term, and despite being first they haven't managed to construct that moat.

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Ramridge 18th Aug '17 3 of 18

In reply to bestace, post #2

Bestace. Re. SYSTEM1 I have to say that I was less than overwhelmed by the CEO Kearon's performance in a TV interview on ProactiveInvestors. That was one factor in selling my shares soon after that.
Using System 1 thinking as a new approach to marketing, and selling this idea to his clients is one thing. But I suspect he also runs his organisation in a System 1 fashion!

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JohnEustace 18th Aug '17 4 of 18

Re SYS1, it seems remarkably inept that they changed their name to one where they don't own the default web address at I wouldn't hire someone to do marketing for me that does something like that in their own business.

Any guide to starting your own business says to check that you can get the web address and trademarks that you need as one of the first steps.

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Ramridge 18th Aug '17 5 of 18

In reply to JohnEustace, post #4

By the same token I would be wary of hiring a firm that predicted Le Pen will win over Macron because that's what the application of their System 1 method said.

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Graham Ford 18th Aug '17 6 of 18

In reply to bestace, post #2

Bestace - the function of marketing is not to induce people to buy things that they don't want or need.

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Redrichmond 18th Aug '17 7 of 18

Very,very interesting and apt... "Economical moats???"

I was just reading/researching the article on economical moats and building moats round the castle as a defence by Ed

I forked 2 screens one for AIM snd one not... Sys1 is on there

Just shows no screen is 100%. Some tweaking requiring Ed?

Will research this afternoon in the office. Never get bored of Stockopedia and playing with the data

My BUR holding is up 100k in 1 year, think I will just stick with that (which is on the moat screen)

Was looking at JIM and BVXP and iii on this moat screen all look good

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Graham Ford 18th Aug '17 8 of 18

I think there's less to System1 than meets the eye. Perhaps they tell a good story, but is there much substance to it? Perhaps the clients who were initially seduced by what sounded like a fresh approach that offered the prospect of a greater level of success are now starting to find that it is not yielding the fruits they expected.

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topvest 18th Aug '17 9 of 18

I've always cast me eyes over this business, but its always been far too expensive for me. Undoubtedly its at the quality end, but I've never quite felt the valuation to be realistic.

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iwright7 18th Aug '17 10 of 18

In reply to Graham Ford, post #8

I am inclined to agree about the video having just watched it for the 1st time. The CEO seems very happy that his competitors are copying their techniques - no wonder there is a problem with "market competitiveness". Then there is the name change from something creative, to something boring - Did they not apply their own research? Not impressed.

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Splode 18th Aug '17 11 of 18

Today’s is the 4th or 5th plunge in the SysGroup (LON:SYS)1 SP of 25 to 45% in the last 5 years, but the CAGR of the 5-year trend-line of the SP is 20% - a lucrative if stomach-churning performance. Not surprising for a small company in a very low visibility business with irregular large contracts. Its size has allowed it to be innovative and nimble but, as you say Graham, it may be becoming harder to keep ahead of the competition. Or it may recover from today’s plunge as it has from every other plunge so far. I think by its very nature it is difficult for someone like myself (who sees market research as a very murky world) to get my head around.

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Graham N 18th Aug '17 12 of 18

In reply to Camtab, post #1

Hi camtab, the system has a bit of a problem reading SYS1 with the pound sign before it, that's all. Thanks for the tip anyway!


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Camtab 18th Aug '17 13 of 18

In reply to Graham N, post #12

Ah that's what it is! I couldn't work out why I was getting the wrong stock. Thanks for your comments as ever Graham.
Have a good weekend. I hope Paul wasn't any where near this mess in Barcelona!

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sharw 18th Aug '17 14 of 18

Redrichmond mentioned economic moats. Ben Hobson wrote of this just 3 days ago and top of the list was.........

The screen may have pointed towards a moat without defining it. In this case the video mentioned above provides the clue. About 40 seconds in to the CEO admits that whereas the company had a unique method when it set out 16 years ago the rest of the industry has now changed in that direction. That is a clue to look at the balance sheet intangibles. Does it have any patents or similar for this method? No. All I can find is software at a cost of £1,604,000 being amortised over 7 years with 9 months left to go.

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jonno 18th Aug '17 15 of 18

One of the challenges of investing is knowing when to sell. Invariably I sell my winners too early, once I am unable to justify the share price based on the fundamentals. The problem is that my idea of fully valued and Mr Markets more often than not do not accord, especially in a bull market. Recent examples being the sale of tristle and zytronic some 15% below their current prices. It also occasionally results in hanging on to losers such as Next where I failed to recognise the extent of the challenge posed by the likes of Boohoo and economic difficulties faced by high street retailers.

I bought Sys1 about 2 years ago following a share price plummet similar to today and after an article in Money Observer prompted a little research. The high margins and cash generation were particularly attractive, although the lack of visibility was always a concern. This time my approach to selling worked as I disposed of my remaining holding a few months ago. It just goes to prove the old adage that timing the market is a fools errand and owes as much to luck as foresight.

Condolences to those who held Sys1 this morning. Still as Splode mentioned it may well make a comeback as it has done previously and I think may be worth a purchase once the price comes back further to reflect the fundamentals.

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ganthorpe 18th Aug '17 16 of 18

Re SYS! - the objective is to induce people to buy whether they need it or not.
It is cynical to say "that they don't need"
As for changing the name to one which you can't have the IP - I find that amazing - it's not as if it's a descriptive or memorable name

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LilliputTom 18th Aug '17 17 of 18

I am a holder and had wanted to watch to see how the change to 'System 1' and new strategy played out. I will be following the advice of the profit warning guide and selling on Monday morning (unable to trade today and wished I had a stop loss!)

I think that as well as the competition adopting their behavioural insight methods, thr move to system 1 seems also to have made the business more like it's corporate competitors. The attraction in Brainjuicer was always the quirkiness, lack of corporate hang ups and different way of thinking (just look at the old website to see what I mean).

If you want large scale corporate market research why wouldn't you go to one of the bigger players anyway?

But on the other hand, I gave benefit of the doubt in thinking that there wasn't a path for growth unless they changed strategy. Turns out that change is proving much harder than expected

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Nick Ray 18th Aug '17 18 of 18

SYS1 seems to be joining the growing group of stocks which reached a high in May and have then slipped back 20-30% - either slowly or quickly. This isn't happening with most stocks, but there is a significant group which have been feeling head winds since June.

You can see the effect in the following plot of quantile performance for the aim100 stocks since the beginning of the year.

The top three red lines are the 75%, 90%, and 95% quantiles. The magenta line is the 'mean', the black line is the median (50% quantile) and lower three red lines are the 25%, 10% and 5% quantiles.

What is noticeable is that the quantiles are fairly closely spaced until the end of May and then the lower quantiles drop off quite quickly even though the upper quantiles seem to be quite stable. (NB: this is a log scale so a straight line on this graph represents constant growth.)

The effect is a bit exaggerated with the AIM100 set which makes it easier to see, but it is present even with a plot for most shares on the LSE (see second plot).


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About Graham N

Graham N

Full-time investor and independent analyst. Prior to this, I spent seven years in the financial markets as an analyst and institutional fund manager. I'm CFA-qualified and hold an audited, FTSE-beating investment track record.  Away from finance, my main interests are recreational poker and everything to do with China, especially Mandarin Chinese. more »


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