Small Cap Value Report (2 May 2014) - GOAL, SDM, SSTY, UMTP, RHL

2nd May '14 by Paul Scott

12 comments 17413 reads

Good morning! It's very quiet for news this morning, so I could have had another hour in bed!

Goals Soccer Centres (LON:GOAL)

I last reported on this chain of soccer centres on 10 Mar 2014 when they announced a Placing to raise £11.4m, which was about 10% dilution to existing equity. I'm impressed that Canaccord successfully got the Placing away at nil discount to the previous night's closing price of 216.5p, which is most impressive. Nobody minds Placings that are at the market price, it's the deeply discounted ones, with no Open Offer for existing holders, that are objectionable.

The company had too much debt before the Placing, and arguably still has rather a lot now, but it's certainly in a much better position having strengthened its Balance Sheet. The roll out looks slow though, with only two new centres being opened this year, and three planned for 2015.

On current trading, the company today says;

In the period since we announced our results for the financial year ended 31 December 2013 trading has been satisfactory and in line with expectations. The Board remains confident of Goals' continued progress in 2014 and beyond.

As you can see from the Stockopedia valuation graphics below, this share really doesn't look good value at the current price of 232p per share. Most bars are either amber or red, indicating that the share is expensive. Although note that it scores highly in the Quality section, which is why investors are prepared to pay a high price for the stock.

Stadium (LON:SDM)

This is a small electronics group, with a market cap of £20.4m at 68.9p per share.

The trading update today to coincide with their AGM sounds encouraging;

Trading in the first four months of the year has been in line with management expectations, and significantly ahead of the equivalent period last year. This improved performance is in part due to the reduced cost base following the restructuring carried out in 2013, and stronger trading, particularly in Asia and Power Products.

Consequently, the Board remains confident about prospects for the year.

The…

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Jardine

2nd May '14

Paul,

With reference to SafeStay, I would be interested in the factors you considered in deciding whether the initial £6.6m market cap was about right or offered good value.

Andrew

Paul Scott

Hi Andrew,

Re. SafeStay (SSTY), I read the admission document ("AD"), and just formed an overall view on what I think the company could be worth once they have rolled out the format to several more sites.

Positive factors include that the first site is already profitable - that's key to any roll-out in my view. Contrast that with say DP Poland (LON:DPP) which is rolling out loss-making shops in Poland, clearly a very bad idea.

Point 7.5 in the AD shows that in calendar 2013 the first SafeStay site had turnover of £1.9m, and made a positive EBITDA of £550k - not bad going! Bear in mind that it has scope to further improve on that trading performance, as occupancy grows.

I reviewed the pricing on their website, and think it looks good value for money, and customer reviews are excellent. I also reviewed the location, which whilst not exactly salubrious, is close to a tube line just 4 or 5 stops from Piccadilly Circus and Oxford Circus.

The Balance Sheet looks OK, with net tangible assets of £8.1m at 31 Dec 2013, including a £3.6m revaluation of the freehold, from adding value over and above the purchase + fit-out cost. That demonstrates that conversion into a hostel is value creating.

I'm told management here know what they are doing, having made some enquiries.

Overall though, I just like the concept, and am prepared to pay a bit more for it in the early stages, to allow for future growth. It struck me that £6.6m mkt cap at IPO is a reasonable valuation. As usual that's just my personal view. There could also be scarcity value to the equity, since the free float is so small, yet it's a good & profitable story. So often this type of share is promoted in things like IC and Shares mag, and can capture the imagination of retail investors, who often buy the story and don't look at the figures at all.

DYOR as usual!

Regards, Paul.

beatingmrindex

@Paul the other thing to mention in E&C was the dog of london but there is a massive regeneration programme happening there, so if they own the land in E&C it could be worth a lot more going forward. Hostels are an easy business to make good return provided you have tight controls over cash.

evoh_1

£SSTY may have issues raising more capital through share issue due to covenants on the convertible loan stock that prevents further dilution.Also when they are converted at 57.5p there will be >26% dilution.

If they do take the route of using finance to expand I'm not entirely happy to take on more leverage risk unless there is decrease in the annual interest payments as a proportion of profit.

Hi evoh_1,

Good points. Although there's no reason why SafeStay has to buy freeholds. It could take leasehold sites in future, and if they are in run-down areas, even get paid a reverse premium to help towards the fit-out costs. That, plus a bit of bank debt could potentially finance a roll-out without any new equity being needed at all.

Given that the first site hit the ground running and is already decently profitable, I'm not worried about the roll-out. The main point is that they have proven the model works, hence why it's interesting as an investment in my opinion.

Regards, Paul.

Katewarren

Paul, I note that REDHALL (RHL) raised £7.5m in a recent (7/3) institutional share placing. I note that Henderson Global Investors, Oryx International and Octopus Investment Nominees Ltd now have a combined share holding of 41.63%..........are there some small cap experts here who may perhaps have a little more hope for the future of RHL ?

Hi Paul,

You make a fair point about the roll out, basic old school rule of investing.

A) Do they have a successful business?

B) Can it be rolled out elswehere?

I will sit on the side-lines with this one and wait to see how the financing of the expansion plans goes, and when they plan to do so. At the moment I think I have a better company to increase my position in that has a clearer route to expansion that is operationally leveraged.

All the best, Jon

NS23

It's Friday afternoon, so maybe i can be afforded this slightly off topic question.
I was just looking at the AD for SafeStay...
"Placing of 9,600,000 ordinary shares of 1p each at 50p per share"

Why do shares always get described as being 'of a certain-always-really-small-value', 1p in this case.

I see that these are 'ordinary shares' is it possible for the company to issue other types of shares with a different value, eg preference shares of 0.5p each, which would then trade half the price of an ord?

It's just one of those things that always baffles me,

Thanks, Nigel.

Hi NS23,

The Nominal price of a share is set when a company is created. So if I set up a brand new company, I might decide to create shares of 10p nominal value. So I might then decided to issue 1,000 shares to myself, and I therefore pay £100 into the company bank account from my personal bank account.

The company trades successfully, and grows. So I then decide to include a new shareholder, say to a business partner or key employee, and want to issue them with 500 shares, so that they own a third of the business. However, I'm not going to issue shares at 10p any more, because the business is bigger & more successful. So I agree a valuation of the business with the new shareholder of (say £20 per share, valuing the existing business at £20 * 1,000 shares = £20k).

So the 500 new shares are issued at £20 each, so the new shareholder pays the company £10k for the new shares. They are still 10p shares, but the double entry goes;

Dr Cash £10,000
Cr Share Capital £50
Cr Share Premium a/c £9,950

There is no point in increasing the nominal value of the shares, in fact it can be useful to leave it very low, as that means you will be able to issue more new shares, even if the share price collapses (because shares cannot be issued for below nominal value under company law).

Hope this clarifies.

Regards, Paul.

Thanks Paul, indeed that's clear.

Have a great weekend. European markets are open on Monday, so maybe you can get your fix with a few trades over there.

Nigel

Funderstruck

Paul,
just a minor point; would the example company not then be valued at £30,000 & the new ptr has a third with 500 x £20.

I do like the SSTY concept , far lower cap than I normally go for but the product & its' marketing are captivating.

Hi Funderstruck,

just a minor point; would the example company not then be valued at £30,000 & the new ptr has a third with 500 x £20.

Yes, that's correct. In the example I gave, the company was valued at £20k pre new money (£20 per share * 1,000 shares in issue), and hence would be worth £30k post new money (£20 per share * 1,500 shares in issue)

Small Cap Value Report (2 May 2014) - GOAL, SDM, SSTY, UMTP, RHL

Goals Soccer Centres (LON:GOAL)

Stadium (LON:SDM)

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Paul Scott

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