Small Cap Value Report (27 Jan 2017) - LOOP, RTC, TET, UBI, CTO

Good morning!

It's a really busy day for me today, as I have an investor lunch at noon, then a 2pm meeting with MySale (LON:MYSL) (in which I hold a long position), which should be really interesting. I still haven't got round to reporting on the recent trading update from MYSL, so will aim to put together an article here over the weekend combining both the RNS and today's meeting. It's another of these internet retailers that is difficult to value, and now looks very expensive on conventional metrics.

LoopUp (LON:LOOP)

Share price: 173.5p (up 3.0% today)
No. shares: 40.8m
Market cap: £70.8m

(at the time of writing, I hold a long position in this share)

Capital markets day - skip this section if you're not interested in growth companies.

I promised to report back on a meeting which I attended on Weds this week, at LoopUp's Shoreditch office. This company caught my eye a few weekends ago, when I was familiarising myself with recent new floats. I narrowed it down to 2 interesting companies, FreeAgent Holdings (LON:FREE) and LoopUp (LON:LOOP) . So it didn't take that long to quickly read both their admission documents, and all the RNSs to date. I've read so many over the years, that it's easy to skim through them, identifying the important bits.

LoopUp offers an innovative conference call software. It's cloud based, and works tons better than conventional conference calling. Key features are;

• No training required - it's intuitive to set up & use.
• Instant setup - due to it being cloud-based. No complicated downloads or plugins. You're up & running very quickly & easily, in a completely automated process.
• Better control - the user sets up a conference call through Outlook or other calendar software. LoopUp then dials out, to bring in the attendees. A control panel shows exactly who is in the meeting, giving enhanced security. Background noise can be muted, and the control panel shows who is talking at all times.
• Screen-sharing allows collaboration, presentations, etc.
• Reliability - battle-proven software.
• Deliberately light on features - the overriding aim is to make it simple & intuitive to use.

The trouble with meeting management, is that if they're likeable (and I tend to like most people) then you can end up forgiving their mistakes, and giving them the benefit of the doubt when things go wrong. All in all that can be a very expensive mistake, as I have discovered to my cost.

Also, I self-impose a ban on buying shares in any company within 48 hours of meeting them. That gives me a cooling-off period to allow doubts to gestate, and generally for the glow from the meeting to wear off. Although sometimes this rule needs to be broken, when you find something really exceptional.

So going back to the LoopUp meeting, it was very well attended, with a mixture of analysts & fund managers. So this company is beginning to be noticed. The trouble is, the free float is only about 8%, so buyers are currently very much constrained. That's good for the share price of course, as people have to push the price up to get hold of any decent size.

The slides from the meeting can be downloaded here. If you read through the slides, the investing case should become obvious;

• The company is achieving top line growth of c.35% p.a., which is compounding nicely.
• A flow of recurring revenues is therefore being built.
• Customer churn is negative - i.e. customers which stop using the product are more than outweighed by existing customers increased usage (on a PAYG fee basis, so more use = higher revenues for LOOP)
• Customers who try the product love it. I can testify to this, having taken a free trial from the company's website.
• Gross margins are c.75%, so there's serious operational gearing in this business model, providing growth continues to be rapid.
• Hardly any inbound marketing has yet been done. So growth is being achieved by sales agents, arranged in "pods" which are incentivised as a group. With a new £1m marketing budget just being deployed, I am hoping to see growth accelerate.
• The return from each pod is outstanding - within a year they are more than paying for themselves.
• The company has been established for quite a few years, so has been through the growing pains & cash burning phase already.
• Staff are young graduates, who are taught to do things the LoopUp way, rather than having learned bad habits elsewhere. So selling is consistent, and people are well-trained. Staff retention is excellent. Staff mingled with us, and it's obvious that they enjoy working for LoopUp. It has the feel of a company which is going places.

My opinion - I like everything apart from the valuation! There's no denying that a £70m market cap is building in a lot of future expectations. That said, if you roll the figures forward a couple of years, this company should be generating decent profits. Panmures has a note out, giving EPS estimates as follows;

2016: 1.3p
2017: 7.2p
2018: 13.8p

Normally I would disregard such aggressive forecasts, but in this case those figures do actually make sense. Although as I pointed out to the joint CEOs in the Q&A session, personally I would prefer them to focus on accelerating growth (even if that means running at breakeven for a couple of years). Management responded that they had to stick with the plan set out at the time of the IPO - which is to achieve a balance between growth & growing profitability.

Downside risk boils down to 2 things really;

1) Someone else launches a better and/or cheaper product.

2) Growth fizzles out for any other reason.

If those downside scenarios were to happen, then the share price would probably crash. So this one is not without risk. However, for now anyway, this company seems in a sweet spot. There's also the possibility of a takeover bid, because this is a very hot area at the moment. The company operates globally, but with most of its operations in UK & USA. It might therefore be spotted by an aggressive buyer, and some of the prices being paid for similar companies in Silicon Valley are eye-watering.

So overall, it's not cheap, but I think looks a very interesting company. Hence my intention is to hold for the foreseeable future. Although if the share price goes bananas, then I reserve the right to top-slice my personal shareholding. I think you can justify a price of 300p based on the Panmures forecasts, so I'm not intending on selling any below that, based on current information.

As always, please treat my views critically, and do your own research. I might have got a little over-excited about this one. The Stockopedia computers are throwing a bucket of cold water over me, with a lowly StockRank: 

RTC (LON:RTC)

Share price: 55p (up 26.4% today)
No. shares: 14.5m
Market cap: £8.0m

Trading update - this minnow staffing group is a little below my usual market cap lower size limit of £10m. However, it's worth a quick mention as this trading update reads well, and has certainly put a rocket under the share price.

I'm surprised though that the price is up so much - probably more to do with the lack of liquidity in this share, as it's only an in line update:

"We are pleased that our trading is in line with market expectations.  All of our group businesses had a strong end to the year and we remain confident that this positive momentum will continue in 2017."

Stockopedia has 8.4p EPS forecast for 2016, so that suggests a PER of only 6.5. I'm not sure why the forecast for 2017 is lower, at 6.2p EPS, which seems odd. Do any readers have any inkling as to why this would be the case?

My opinion - it's not a bad little company, but all smaller staffing companies are dirt cheap right now so I'm not sure why people would want to buy the smallest & most illiquid?

I'm rapidly running out of time, sorry about this, but quick comments only now:

Treatt (LON:TET) - this trading update reads well;

"We are now almost four months into the current financial year ending on 30 September 2017, and I am pleased to report that the business has made an encouraging start to the year with both revenues and gross margins being above the same period last year.

Similarly, order book levels continue to be above the same period last year as the impact of new business wins begin to convert to orders, which augurs well as the business enters the seasonally busier time of the year.

Although there is obviously still a long way to go, we are confident that we will meet the Board's expectations for profit before tax for the year ending 30 September 2017."

That sounds very good to me. It sounds as if the company is ahead of plan, so there are likely to be forecast upgrades in the pipeline - always a nice tailwind to look for when one buys into a company.

My opinion - I'm tempted to buy some actually, so it will go on my list of companies to research further. The company seems to be on a roll, and the valuation seems OK - not cheap, but if earnings forecasts are going up, then the PER would drop to a level that seems reasonable to me.

Ubisense (LON:UBI) - there are signs of life here, with a positive-sounding trading update today;

The Company showed continued good progress in terms of revenue growth, margins, cost management and order book, all of which are significantly better than those achieved in 2015...

Various other points are mentioned, e.g. a contract win, and favourable cash collection.

The RNS is noticeably light on figures though. Given this company's poor track record, I would want to see hard numbers before buying into the turnaround story.

It does look potentially interesting though, if the company can move into profits, after several years of losses.

T Clarke (LON:CTO) - a very good update today, with the share price up about 19% at the time of writing.

Got to dash. Have a lovely weekend!

Regards, Paul.