Small Cap Value Report (23 May 2014) - BLUR, MOSB, SSP, CFHL, ESS

23rd May '14 by Paul Scott

16 comments 20115 reads

Good morning! Apologies for being a little late today, as I was watching the election coverage on television until the wee small hours. Also I had a very interesting afternoon at the London Value Investor Conference yesterday, and have got copious notes that will turn into an article or two here in the coming week or so. Private Equity guru Jon Moulton was the stand out speaker for me - his talk was full of wit & wisdom, which I shall report back on at a later date.

Blur (LON:BLUR)

This would make a great case study of a typical over-hyped growth stock. It's been an absolute car crash for investors in recent months, because four factors converged;

1. Aggressive revenue recognition which has (presumably) been challenged by the auditors, and has resulted in accounts being late (always bad) and reported revenue falling way below forecasts.

2. Being heavily loss-making.

3. Running out of cash.

4. The above coinciding with a sudden and considerable loss of market appetite for risk.

Blur's business is basically a website where suppliers can tender for work in many areas such as marketing, design, app development, etc. So it's an online marketplace for services. Blur seem to take a remarkably high 20% commission, which as several people have commented to me is probably too high to be sustainable long-term for volume work.

Results for the year ended 31 Dec 2013 have been published today, and look pretty awful to me. Revenue was $4.8m, but bear in mind this is the gross project value on Blur's website, plus listing fees. So really I would suggest that the gross profit line of $1.16m is closer to what I would regard as proper revenue - i.e. revenue attributable to Blur.

The company generated a $6.5m pre tax loss for the year, and that's a proper trading loss, there are no exceptionals. Put another way, the company would have to grow turnover by a factor of 5.6 times, with no increase in overheads, just to reach breakeven.

Bulls will no doubt say that early stage growth companies are nearly always loss-making to begin with, and that it's the growth which matters. That's a fair point, but you cannot afford to have any bumps in the road along the way. So…

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Edward Croft

23rd May '14

This is one of those red flag stocks that Stockopedia's stats got completely spot on - Ben continued to warn of this in the excellent blog post he did last week. http://www.stockopedia.com/content/6-red-flags-that-could-have-kept-you-out-of-blur-group-83359/

it_trader

Hi Paul,

I'm from an IT background and worked with many Finance Systems that as far as I'm aware can pretty much deliver required financial reporting in real time.

So barring internal process issues meaning subsequent late data entry why are finance reports so slow in being produced after period ends with these sophisticated enterprise wide systems in place?

I obviously allude to your FD experience and knowledge here!

Paul Scott

Hi it_trader,

Absolutely, it's crazy for results to be this late.

Back in my FD days, in the 1990s, when we were using creaking off the shelf "Pegasus" software, with manual data entry clerks, and SuperCalc spreadsheets (!), we still managed to have year end accounts ready for the auditors about 3 weeks after the year end, and signed off audited accounts about 5-6 weeks after the year end. That was for the main part of the business I worked for, with about 100 branches & turnover of roughly £60m. We had about 10 other smaller companies, which were not part of the group, so we would do the accounts & audits for them at a more leisurely pace, as they didn't really matter.

So for Blur (LON:BLUR) to be reporting 31 Dec figures near the end of the following May, is unbelievably poor. Especially given that it's a tiny business! That screams to me lack of internal controls, and a generally weak finance department & FD.

As Jon Moulton said at yesterday's conference, companies that report their accounts late ALWAYS bring bad news. People who recognised that, and sold out at the first sign of trouble would have protected a lot of their capital compared with people who did nothing and watched as the price collapsed.

Regards, Paul.

janebolacha

Blur was being recommended by Red Hot Penny Shares, in this month's issue, as "a buy at up to 290p with a target of 800p". Astonishing.

Hi jane,

Blimey! We all get things wrong sometimes, but that's a real howler!

I probably shouldn't say this, but I was approached to possibly take over as Editor of Red Hot Penny Shares not long ago, but I made it clear that I wouldn't tip blue sky shares, and also that they would have to change the name to something less ramptastic. Needless to say, I didn't hear back from them!!!

Regards, Paul.

NS23

Blur (LON:BLUR) is the biggest disaster I've seen in my short time looking at the markets. 800p - 80p in 4 months.

What amused me was that one of their financial highlights was an INCREASE in LBITDA

Nigel

kenobi

In technology, they talk of adoption cycles and life cycles, so cd took many years to establish, and is dropping off now, dvd came and went relatively quickly, (bare with me won't be long), blue ray took off pretty quickly with hd, but is being displaced by downloads/streaming.

Like wise in the financial world the first .com boom took years to build up into a head of steam and then collapse, having some recoveries on the way, this time has it been 1 year ? perhaps 2 at the max ?
It's good of course, shows something has been learnt , and that while people will probably always buy on momentum and blue sky expectation, reality is dawning much quicker. I don't suppose they'll be many pet food online type companies listed (unlike the first dotcom bubble).

The real question for investors is what next ? are we at the top of the cycle ? some earnings seem to be disappointing, (supermarkets, m&s spring to mind) however with the economy growing at 3% pa (ish), there must be growing earnings somewhere, surely these companies should pull up the indexes ? though we can't expect all shares to rise with the tide as we've seen in the last few years,

Thanks as usual for your insights,

cheers K

If there was anybody which I doubt, waiting in the wings to invest in the bleak hope of a bounce/oversold possibility, and they read that!!!!

LBITDA increased to $6.37m (2012 $1.81m)
- LBITDA is loss before interest, tax, depreciation and amortization.

MrM

It reminds me very much of the last days of the dot-com mania.

When they couldn't value businesses on P/E or dividends, they turned to "Eyeballs" on websites, and then cash burn became the preferred measure, ie the faster you were losing money, the more the business was worth. (It supposedly meant the business was growing very quickly).

And then it all turned to pumpkins and mice, to use Warren B's phrase.

I think it happened recently with the Twitter IPO too, publicising their own KPIs to investors as if they mean anything investable. There's no point stating how membership is growing etc if it has no cause/correlation with revenue and margins.

Membership into new territories, and subsequent markets is another matter ;)

With regards to Blur, flipping a well established although flowed, metric like EBITDA on its head so as not to easily display a growing loss is deliberate deception. They are now open to having their integrity questioned too alongside their skill at running a company and business model.

Ramridge

Hi Paul
Blur is indeed a car crash and probably totally uninvestable as some of the details in the published accounts reveal.
- blur seems to have persuaded its auditors to treat it as a principal in all transactions between its customers and experts. The result is totally inflated revenues. This is like ebay treating as revenues the sum total of all estimated values of all the stuff out there under an ebay auction.
- blur is basically a trading platform. Businesses with such a model usually benefit from significant operationally gearing. I.e. An additional £ in revenue should only give rise to a fractional additional operational cost, leaving the rest to flow to the bottom line. In the case of blur, $6.2m of the $7.7m operational loss was down to people and administration costs. An increase of $4.2m from the previous year, I.e by a factor of just over 3. Capitalised platform development costs are I believe additional to this. However revenues increased only by say 20% of $2m= $400k.
Somewhere in the accounts it describes itself as a disruptive technology. Well it's certainly disruptive. Ask any current shareholder.
Regards. Ram

Talking of misleading KPIs, the best example I saw of a misleading chart, was one put out apparently by the Florida police, which just inverted the Y-scale! Maybe this technique will find its way into financial reporting - wouldn't surprise me in the least!

cig

Florida Police apparently only supplied the data (it does look too clever by half for coppers) and the chart was made by Reuters staff (as shown on the chart). She said it's supposed to show a "dripping blood" effect (hence lots of red = bad) though I doubt anyone gets that (I certainly didn't). So it's more a case of dataviz wizards trying to be too clever than misleading with intent.

kevanp

Call me old-fashioned, but I don't find the inversion misleading. We are used to viewing investment graphs which imply good things the higher they go up the y-axis. I assume that fewer murders is a good thing, so to me showing an upward trend towards fewer murders makes sense.

Kevan - you're old fashioned!
The point is that when the law was changed, which is flagged on the chart, the chart immediately plummeted - which meant that LOADS MORE people got murdered when this law was enacted! But the chart looks great, because they inverted the Y-axis, so it looks as if murders suddenly reduced when the new law was enacted.

Anyway let's not analyse it too much, it was only a bit of fun, unless you were one of the statistics within that data.

SimonJohnsonUK

24th May '14

Morning Paul,

Thank you for another enjoyable and informative report, please don't go anywhere!

I have a Moss Bros in my high st (Chelmsford, Essex) it was revamped as part of the facelift programme. The now owner of the business bought it back from the capital investment company he sold to after they cods it up as I understand. He's slowly trying to get everything into order and giving all the stock lines a refresh. Im 29 and have bought quite a few bits from my store, it's good quality, fashionable and smart. I also bought a "tailored" suit which has been excellent for special occasions. The staff are all incentivised most I spoke to have share options but there genuinely helpful and seem to be very proud of their new shop.

A good company I feel but I also agree with you that at the current price it's unapproachable as an investment. Watch this space you never know Mr M might present a better price one day :)

Oh and apparently they are expecting more wedding hire business this year as it was popular to skip 2013 as an unlucky year to tie the knot. Who knew.

Small Cap Value Report (23 May 2014) - BLUR, MOSB, SSP, CFHL, ESS

Blur (LON:BLUR)

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Paul Scott

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