Small Cap Value Report (20 Jan 2020) - FEVR, SOS, BOOM, KAPE, DIS, MCON, APTD

20th Jan '20 by Graham Neary

65 comments 12336 reads

Good morning!

I'm giving Paul a break after a couple of mammoth weeks on the job here.

His top holding has announced a trading update, and there are plenty of other stories for us to digest.

I'm not sure how far I'll get, but these are all the small-caps I noticed which made announcements this morning.

Finished at 5.20pm: Made it as far as APTD.

Sosandar (LON:SOS)
Audioboom (LON:BOOM)
Kape Technologies (LON:KAPE)
Distil (LON:DIS)
Mincon (LON:MCON)
Aptitude Software (LON:APTD)

Not covered today:

AFH Financial (LON:AFHP)
Argo Blockchain (LON:ARB)
Accrol Group (LON:ACRL)
Renewi (LON:RWI)
Bonhill (LON:BONH)
M&C Saatchi (LON:SAA)
Tekcapital (LON:TEK)
Coral Products (LON:CRU)

In the world of big-caps, Fevertree Drinks (LON:FEVR) announced revenue growth of 10% - "below the Board's expectations, primarily reflecting subdued Christmas trading in the UK".

Fever-tree's margins have also declined, and it says 2019 earnings will be 5% below those of 2018.

That is not baked into any public forecasts I can see, and I would therefore expect to see significant selling pressure on the stock this morning.

Long-term prospects are probably still excellent, I think - I've been thinking about buying into it for a while, and will be checking to see how far it falls today!

Sosandar (LON:SOS)

Share price: 28.25p (pre-market price)
No. of shares: 163 million
Market cap: £46 million

Trading update

I'm happy for Paul and other holders of this share:

Revenue for the full year on track to be ahead of market expectations

But the loss for the year will also be higher then expected:

Given the upfront cost of acquiring new customers against the benefit over the lifetime of the customer, the Company expects this investment to result in the net loss for the full year…

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Rusty2

20th Jan '20

Graham thanks for the Kape Technologies (LON:KAPE) review it has been on my watchlist for a while, I did not know about the Israeli connection that is a bit off putting.

oaktree

Thanks Graham for the LinkedIn tip, in terms of finding where staff are located. Very interesting as I currently hold Kape.

sharw

Coral Products (LON:CRU) is at the bottom of Graham's very long list. In case he doesn't get that far this company can be summed up by two words - serial disappointer. The future, however, is always good provided shareholders hang on to their rose tinted spectacles.

8/6/17 PW problems at one subsid but "Overall Coral remains profitable, cash generative and with a strong asset base". CEO and CFO go.

11/10/17 Upbeat AGM statement "the Group has continued its improvement .."

12/1/18 PW "Group's results for the year ended 30 April 2018 will be materially below market expectations".
At this point I got out - I held in a dividend portfolio and that looked in danger (yes - subsequently cut completely) but also I had simply lost confidence in management who told you all was fine and a couple of months later told you it wasn't.

23/10/18 another upbeat AGM starement "With October well advanced we expect a much-improved performance overall for the six months to 31 October 2018. We remain confident of further progress in the coming year"

26/3/19 PW "the Board therefore now expects the Group's results for the year ending 30 April 2019 to be materially below both Management and Market Expectations". Confirms interim dividend would be paid but turned out to be last.

25/9/19 PW at AGM after first 4 months "sales and profits are below management's expectations...expect to still report a satisfactory outcome for the year as a whole.".

Today "we are likely to report a small loss before taxation overall for the full year and a small drop in EBITDA from the previous year. We are confident that we can build on this base and in our future performance."

Since no broker dares to produce a forecast these days we do not have anything with which to compare that statement but the market reaction says it all. Bargepole territory IMHO.

Lee Gilbert

Yes, it happens relatively frequently. Google's algorithm is constantly being evolved to serve users the best search results. A websites rankings can be affected both positively and negatively when google rolls out an algorithm update.

Graham Neary

You're very welcome, Herbie. Glad to be able to point it out. G

bryans1311

My point was related to the mathematics rather than SOS as an investment. If you can point me to a functioning time machine, then yes, I’ll buy them at 15p!

dscollard

Excellent analysis Graham on Sosandar (LON:SOS), it does spark a thought on cognitive bias and how none of us can be objective when we have a position, it is simply an impossibility.

It would be extremely useful if you and Paul occasionally "take the other side" of each other's positions. Ideally independently of news flow and in practical terms, when there isn't much news flow. (and assuming a degree of sector/domain expertise). Maybe as separate cameos supplemental to SCVR? Done in a friendly but objective manner it could provide a lot of insights and balanced arguments.

James Weston

From memory, I think the exact same thing happened to them last year as well.

MiserableJacktPotato

Not sure I missed the point - the comment "we don't know the loyalty or lifetime value of a customer" seems to cover your points quite succinctly.

GrahamF

Coral Products (LON:CRU) was a Neil Woodford holding in the Patient Capital Trust at one time. I don’t know if it still is. It is almost becoming a case of make sure you avoid anything touched by him as more often than not they seem to disappoint.

thirty fifty twenty

Sosandar (LON:SOS) and broader...

I think the SCVR report today has been an exceptional source of learning. I feel that as a customer I am getting excellent analysis when both Graham + Paul are able to provide detailed, specific and balanced analysis as they see it which then encourages a variety of posts from informed subscribers.

Sosandar (LON:SOS) has been at the back of my mind all day for a couple of reasons..... (1) I thought the price might fall further in reaction to an RNS which is in fact a PW (Profit Warning) albeit at the same time a SiS (Sales in Surplus!) and with the heavy volume possibly implying there might be support for the share price around these levels and (2) although the facts seem to be that the CASH was an over spend of 1.6m for an extra 0.6m of sales (verses forecasts), I very much doubt that the mgt team just willy nilly spend on marketing and if they were going to CASH overspend then surely they would have reduced marketing spend and just have to live with the consequences that sales would only go up "only 100%" and not the 136% that they actually did. (whatever the share price - the sales growth, the product delivery and brand development is an impressive achievement).

I was also minded of Purpleski's comments as well as my own thoughts.

Anyway the conclusion I came to , and wondered was there a Stocko community solution, is that our thoughts and posts are very much governed by our investment strategy. I am cautious and am looking to protect on the downside and try to achieve modest cumulative upside. Thus I tend to focus on the downsides of SOS (what they say as well as what they do) and because it doesn't give me my needed level of certainty, I feel uncomfortable and conclude it is not an investment for me. My post reflected this. Similar to Purpleski.

Sosandar (LON:SOS) though has many exciting features. Unlike the majority of my investments it has the potential to rise many fold in value by holding over several years - a la Dart, BOO etc... As Paul regularly points out , there will be bumps in the road if this is the path. Of course also maybe one of the bumps or an external factor will cause problems and the price might fall 50% or more (i'd hope for the vast majority of my investments this is very unlikely). But if this is your investment strategy and you have a portfolio of similar high risk / high reward shares, then Sosandar (LON:SOS) fits that criteria (and you will post similarly).

the end result is that we both post, with opposing views, yet we are both correct as Sosandar (LON:SOS) still fills the correct criteria for our respective strategies.

So, in conclusion, I wondered if like StockRanks, there was any merit to develop a "StratCode" (maybe just the current RiskRating) for us investors and then as well as declaring if we have an economic interest in the particular share we are commenting on, we also declare our typical investment strategy. So my post might be more useful to other 'Cautious Compounders' (Balanced) than to 'Risk Riders' (Highly Speculative), and maybe posts might cause less agitation as it would be more obvious the inclination of the author. i.e. a share (Sosandar (LON:SOS) being a good example) is not for my investing strategy, but that doesn't mean I am saying you are wrong holding it for your particular investment strategy.

thanks for reading! :-)

Stocks123456

Yes, as the business of XLMedia (LON:XLM) is to direct internet traffic, logically they should be best placed to fix the issue. However if it was a minor, day to day issue i doubt they would have informed the market.

skinner66

i did comment over 18 months ago mothercare had it and got slated hence dont comment no more.. glad i was correct

davidjhill

hi Michael,

Risk/Reward is still the same. To compensate for the fact you've missed the double you have to risk twice the capital to achieve a lesser return. This is understandable if you think that at 60p the shares are more than twice as likely to hit 300p than they do at 30p but I'd argue that is probably not the case.

On the other hand if you wait until they have achieved profitability and are still under 60p then I'd say that is probably a fair reflection of better risk/reward. There is of course no guarantee they would be so you risk losing the trade entirely.

Just an idea but If you are cautious but like a stock then perhaps there is a better way to achieve a more balanced risk/reward, which is to average in to the shares based on positive metrics. Just by way of example (ignore the numbers, its just the principle) let's say you want to risk a max of £3000. You could buy £1000 now, then another £1000 if sales targets are hit in the half year and the share price is rising and then a final £1000 on profitability if momentum is still good. You could trail a stop loss based in case of lost momentum etc.

I am thinking of this approach with Augean (LON:AUG) which having done some research I now really like. It appears to have a tremendous moat and an expanding market as well as good pricing power. EPS over the next 5 years has a CAGR exceeding 20% and it trades on a fwd PE of 12 and is highly cash generative. I can see this as a big compounder over next 5 years. My concern is the £45m HMRC tax demand that Augean (LON:AUG) whilst disputing, have shelled out to cease any further penalties and interest. If they win this money comes back but if not it is unclear what the impact will be on future profitability. So I've bought a half position, will wait a few months to check business is progressing well and see what the HMRC case brings and then on good news average up at a higher price. I've therefore protected my downside, with a clear plan on when to purchase the full position.

If you look at the graph Graham kindly posted in his analysis you will see that whilst we don't know the "final" lifetime value it is clearly more than the acquisition costs already. It is still climbing and is likely to do so for a long while to come.

Albertos

XLMedia (LON:XLM)

They issued a RSN at 4:00pm basically saying there's a problem but they can't at the moment quantify it.

To me this simply created a false market in their shares for 30 minutes - and may continue to do so tomorrow if they don't say anything further - driven by uncertainty and fear.

Did they have to issue it ? Perhaps someone can advise me on the rules.

Surely a request to suspend the shares would be better.

It reminds me of Staffline some time ago when they simply said they couldn't produce their accounts due to an unspecified and unquantified issue and then a few hours later requested a suspension - after a drastic SP fall. Again a false market was allowed for several hours.

Phil

(Sympathies to anyone holding)

jwebster

21st Jan '20

XLMedia (LON:XLM)

The RNS states...

"On 18 January 2020, the Company became aware that a number of its casino sites have been manually demoted by Google, which impacts the visibility of the sites and their ability to generate meaningful levels of online traffic, and hence revenues, from new visitors."

Google says...
"
Google issues a manual action against a site when a human reviewer at Google has determined that pages on the site are not compliant with Google's webmaster quality guidelines. Most manual actions address attempts to manipulate our search index
....
Why do manual actions exist?

Ever since there have been search engines, there have been people dedicated to tricking their way to the top of the results page. This is bad for searchers because more relevant pages get buried under irrelevant results, and it’s bad for legitimate websites because these sites become harder to find. For these reasons, we’ve been working since the earliest days of Google to fight spammers, helping people find the answers they’re looking for, and helping legitimate websites get traffic from search."

https://support.google.com/webmasters/answer/9044175?hl=en

Reads like XLM had some natural search optimisation on their web sites to improve their rankings. I remember back in the day popular techniques were loading the web page with hidden text with repeated key words (not real copy) and hiring outsourced agencies to work through blogs with comment pages adding back links to their site. That was many years ago, suspect it's more sophisticated now.

They can fix these issues, google do tell them how. However, having fixed what the issue is their natural search ranking will likely be lower than before.

XLM "owns more than 2,300 content-rich informational websites" that harvest internet traffic which they then sell impressions, banners etc to earn revenues. Google want real content driven web sites to come top of search results, so can be a cat and mouse game.

Parsley

In September Simon Thompson at Investors Chronicle recommended Kape. He's normally pretty savvy. However, the more I googled their people and products the less I liked.

Your time may come again. Why buy at 30p when you can buy at 23p?

dmjram

22nd Jan '20

You can now buy nearer 20p.
The institutions look to be leading the exit charge given the volumes.
Going to be squeaky bum time given the cash burn rate if/when it does need more capital.

Small Cap Value Report (20 Jan 2020) - FEVR, SOS, BOOM, KAPE, DIS, MCON, APTD

Sosandar (LON:SOS)

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Graham Neary

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