Small Cap Value Report (2 Apr 2014) - CUP, CSG, REG, SEA, ANP, SRT

2nd Apr '14 by Paul Scott

27 comments 26270 reads

Good morning. Quite a busy morning with several profit warnings, so here goes.

Cupid (LON:CUP)

I won't beat about the bush, I don't like this company one bit. It operates a number of dating websites, and was embroiled in scandals last year over allegations (on TV & in the press) about customers being ripped off in various ways. The company's explanation that this was due to mysterious third parties trying to scam their users simply does not pass my common sense testing, since the sole beneficiary of trying to draw users deeper into a dating website, is the dating website itself (from increased monthly subscriptions).

The controversial casual dating websites were disposed of, for deferred consideration. The business that is left behind and still Listed has released its final results for calendar 2013 today, and they look very poor to me, especially the worsening profitability trend in H2.

Turnover from continuing operations was flat at £26.6m. What they describe as "sustainable business" (i.e. excluding the effect of cross-marketing from the now disposed of websites) looks very grim indeed, as the table below from these results demonstrates - it's barely eking out any gross profit at all, and generated a £7.4m adjusted EBITDA loss (which as we know is the most flattering measure of profitability);

This is not a viable business, based on those figures.

The outlook statement details the efforts being made to turn around the business, but warns on profit for H1 of 2014, which will be below 2013. The outlook beyond that is described like this;

As marketing spend is increased we expect subscriber numbers and then revenue to grow. As part of our three-year strategy, we will also bring on stream our data proposition in the second half of the year and begin to grow our non-subscription revenue. We expect to be cash generative in the second half of the year and our profitability to be at a positive run rate as we enter 2015. This is all part of the evolution to provide the platform upon which to grow in 2015 and beyond.

So it's a potential turnaround perhaps, but from a pretty bad starting point, based on these dreadful 2013 figures.

Cupid shares are down 9% to 63.5p at…

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Paul Scott

2nd Apr '14

Hi fek47,

I cannot recall meeting the management of Sweett (LON:CSG).
I do know a former employee, who said that the culture of the firm when he was there (albeit a long time ago) was to be rather aggressive on revenue recognition.

The problem with former employee(s) seemed to have been put to be in their Jan 2014 announcement, hence why I bought back into the stock. However, my feeling is that today's announcement has escalated things onto a much worse level, hence why I dumped my position first thing (had considerable difficulty selling at all, as the MMs were running for cover).

It might turn out alright, I don't know. But the risks now look much higher.

Regards, Paul.

Joeydisco

Why is it even legal for companies to de-list?

It seems as if the effect is merely to screw shareholders and declare their investment to be void.

ryanc106

Furious about the latest set of Bad news from CSG. They look a decent company on paper but things obviously arn't as Rosy as they'd like to make out.

Not good at all so have sold my small holding!!

Maddox

Hi Gostevie,

CUP: You obviously have the notion that once fixed up through a dating site - the couple are then fixed up for life. Quaint!

As people live more and more of their life on-line - online dating has become an obvious and acceptable way of meeting a partner. I have two work colleagues, one male one female, both of whom quite happily volunteer that this is what they are doing. There is no detectable reticience from them that is in anyway a grubby or unethical sector. And as for 'no repeat use' - the male is on his third girlfriend - so it appears to be working for him and I guess it will again.

Cheers Maddox

Hi Maddox,

When I referred to the online dating sector as grubby, I specifically meant the way the companies operate, not the customers using these sites - as it is now perfectly socially acceptable to use dating sites. Indeed it makes a lot of sense. I used a couple of dating sites online years ago, but kept selecting weirdos, so gave up! lol

Regards, Paul.

MichaelFBS

I bought Sweett (LON:CSG) yesterday so am down a grand at the moment and am trying to a. figure out what to do and b. what lesson to learn from this rather painful experience! I have not, yet, sold. I did some research (obviously not enough!) including reading your report of 24th October which on balance to me was positive and the Stockopedia figures give a good overall impression. Stock ranks, as of today trading below book, good div, good divi growth, low pe and three directors owning 10% of the shares.

At the moment trying to quantify the allegations but can find very little info. Anybody have an idea what sort of wrong doing may have occurred? Obviously I am viewing it from somebody who is hunting for good news but reading the statements I do feel the market has over reacted. Only time will tell.

Damian Cannon

Hi Paul,

I was wondering if you were planning to take a quick look at the Inditherm (£IDM) results out today?

The market doesn't seem too impressed and the narrative suggests a second-half bias to trading - bad! However the cash control is tight, there is money in the bank and the company looks to be trending towards break-even.

Damian

genghis khan

Hi Paul many thanks for your informative and thought provoking daily articles. Could you please recommend a good book on the fundamental principles of balance sheet analysis. Many Thanks. Ghengis Khan.

kenobi

The customer for a funeral director tends not to be the deceased person but the next of kin

Of course you are right, it was a bit of a off the top of my head example, (some would say I'm off my head, but there's not time to discuss that now), a better example might be wedding type services, where even if people get re married it's a long time in the future, and usually a much smaller deal.

I don't really know how you're defining repeat users though as I guess people join/ leave dating sites pretty regularly depending on whether they're single or not, which when you're young (oh if only!) can change quiet a lot

bsharman

Hi, The initial report was in the Wall Street Journal http://online.wsj.com/news/articles/SB10001424127887323300004578557190292596654

intuitive6191

I dont think that investors can blame themselves too much for investing in Sweett. The Stockopedia stocksheet showed that it qualifed for 4 longscreens, had a Stockrank of 99 and a Piotrowski of 9. I also thought that Paul had done an extremely detailed analysis here.

What it does prove however is that investing purely on the screen information is not sufficient. Hopefully investors who mechanically invest on just what the screens tell them will take note.

The company statements originally declare that it was an alleged incident in 2009 - then 2010 - now 2009 to 2011. It was also originally one employee and now it might be employees. All this gives the impression that despite the various investigations the management are still some way from understanding what has happened.

The SFO are many things - but quick is not one of them. This could drag on for years and cast a cloud over the company. I would find it hard to invest at the current time.

Neither long or short here.

maillotàpoisrouges

I met my soon to be wife on a dating site (one of the big name ones). I cancelled my subscription two years ago, and hence you would have assumed they would take my profile off their website as not to flatter the number of potential dates on offer to exisiting customers. I am however still getting e-mails from women who are active on the site presuming that i am i.e. my profile is still up there as being active. I presume that is what you mean by grubby Paul?!

PhilHofGrowYourDough

"What it does prove however is that investing purely on the screen information is not sufficient. Hopefully investors who mechanically invest on just what the screens tell them will take note"

Please elaborate your argument? Paul did a much deeper analysis than screening and still got caught out, therefore demolishing your argument.

My mechanical screen kept me out of this stock as the debt levels are too high in relation to profits and the spread was too wide.

So I'd argue that actually the data you're suggesting as a screen can be refined to protect you further.

That said if an employee is set upon fraud then neither screens or deeper analysis can protect you.

Regards
Phil

Thanks.

fek47

I think (but I'm only guessing obviously) that Sweett (LON:CSG) will come OK on this. It's far from clear whether any actual payments were made, or whether it was just chit-chat between two individuals over coffee about whether paying a bribe might help either Sweett (LON:CSG) of the American architects to win a contract in Morocco.

Either way, I think very serious questions need to be asked of the company's auditor throughout this period, who I understand was Fiona Kelsey at PricewaterhouseCoopers LLP (a different individual has subsequently taken over). I will be asking what audit procedures she carried to satisfy herself that the company was compliant with anti-bribery laws in all jurisdictions in which it operates, and will post whatever reply I receive from her here in due course.

cig

It may be computer-generated women writing to your old account. The clever thing to do for a dating site is to send faux leads to old subscribers, so as to get them back in, without actually showing the dead profiles to active users, so as not to impair their experience and have them stay subscribed.

Mark Simpson

Re: screen investing - Lots of research in Value, Momentum and Quality strategies plus the stockopedia model portfolios show that they do work (although sometimes before costs) but the key to long term success is diversification. This means that on average the successful investments tend to overcome the ones where the screen is misleading but you have to buy enough companies that the variation around the mean doesn't wipe you out (literally or psychologically) in the short term.

Anyone who went overweight by putting 10% of their portfolio into Sweett (LON:CSG) because it had a stockopedia rank of 99 is missing the point of the ranks. Anyone who put 2% of their portfolio into Sweett (LON:CSG) because they bought the 50 shares with the highest stock rank will probably do ok.

In reality depending on our time availability & personality we all use a mixture of screening and research. One of the biggest mistakes we can make imo is misunderstanding where we are on that spectrum and getting our diversification level wrong. Either doing exhaustive research and owning 100 shares or relying on screening and owning 3 shares. Even those doing exhaustive research are probably over-confident if they own only a few shares since they are over-estimating how much it is possible to know about a company and it's markets - there are plenty of examples of completely unforseeable circumstances negatively impacting companies with great managements and prospects.

I agree re the auditor but I would have thought the company could do a lot of good by issuing a more complete statement to give us (the owners of the company) the information to quantify the issue and thereby either re-assure the market or if the news is dire the market can put a bottom under the share price.

I was in Globo and made a reasonable return and enjoyed being part of the ride but got out of it when it dropped sharply a couple of weeks ago. As my investment in Sweett (LON:CSG) represents less than 2.5% of my portfolio I think I will sit tight and see whether Mr Market just got out of bed the wrong side this morning. After all it is growing sales. growing profits and paying a dividend!

3rd Apr '14

The Middle East is rife with corruption, that's the normal modus operandi in that part of the world.
Best not to get involved.
P.

JoeBlow

Hi
Regarding CSG, thought i should pop out of lurking mode for a mo.

As disappointing as this news is, i think it is a bit unrealistic to take issue with the auditors on this. Auditors work to a level of materiality which is far higher than any bribery is likely to involve, and hence could only be likely to stumble across such instances by accident. it is entirely the responsibility of the directors of the company to maintain and enforce policies which prevent fraud, and even then if a senior employee is determined to work around them it can happen. That said, "material" instances of fraud probably suggest issues with the culture and/or control environment which allowed them to happen. Clearly the current management may not have been around at the time (i am not a holder, thankfully, so haven't looked in detail), but that probably wont save the company from the consequences if fraud is proven.

Either way, not the auditors' responsibility. They have no responsibility for checking the company's anti-bribery policies. Before anyone asks, i say all this as a company director, not as an auditor!

i wish all holders success - this really is an almost impossible one to have predicted, and can happen to any size of business, doing business almost anywhere. FWIW i would suggest that the only thing to learn from this is to maintain a balanced portfolio - but that's hardly original! As for valuing the company going forward, i am with Paul on this. Far too much uncertainty. If the US authorities have any jurisdiction here, they might just choose to set an example.

Small Cap Value Report (2 Apr 2014) - CUP, CSG, REG, SEA, ANP, SRT

Cupid (LON:CUP)

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Paul Scott

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