Small Cap Value Report (29 Jun 2017) - UTW, HVN, PURP, ANP, WIN

Thursday, Jun 29 2017 by
77

Good morning!

There are lots of interesting things going on today, so I'll try to get through as many as possible.

I've been further pondering yesterday's thoughts on whether we've hit a market top. Obviously I don't know whether we have or not, I can only comment on things I observe. It seems to me that the momentum trade - of everything (growth stocks anyway) rising simultaneously, might have ended. Or at least is having a correction.

I think the danger is that we can all think we're ace stock pickers, but afterwards it becomes apparent that we just happened to buy a random growth stock, which went up along with all the others! Then when they fall, they all tend to fall together.

For me, the key thing is positive newsflow. To take growth stocks to new highs, it really does now require excellent newsflow. Not spurious contract wins (which often turn out to be immaterial), but beating expectations, and upgrading forecasts. That's what I particularly look for all the time, but especially now that valuations are very high, and the market feels more nervous. If a company is only meeting, not beating expectations, and the valuation is very high, then maybe it's time to bank some profits?


Purplebricks (LON:PURP)

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

Talking of which, I'm very impressed with the announcement this morning from Purplebricks (LON:PURP) and have this morning bought them back for both BMUS and my real portfolio. Yes, the valuation of c.£1.1bn (at 414p per share) looks crazy. However, its results today show that the UK operation is operating at breakeven after spending £14.4m on marketing. It is now by far the market leader in online or hybrid agents in the UK, and is in a virtuous circle of success giving it more marketing firepower, driving further growth. Consider this;

UK marketing spend in the first half of this financial year is now anticipated to increase by some £3.5m year-on-year, with spend in the second half also likely to rise, should the expected returns come through. As a result UK revenue expectations for the current year are raised to some £80m; a near doubling from the £43m reported for FY17


Bear in mind that this…

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As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested. ?>


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Purplebricks Group plc is a United Kingdom-based company engaged in the business of estate agency. The Company operates through the division of providing services relating to the sale of properties. The Company uses technology in the process of selling, buying or letting of properties. The Company operates in the United Kingdom. more »

LSE Price
120.6p
Change
1.0%
Mkt Cap (£m)
366.3
P/E (fwd)
n/a
Yield (fwd)
n/a

Harvey Nash Group plc is a United Kingdom-based recruitment business company. The principal activity of the Company is the provision of professional recruitment and offshore solutions. The Company's segments include United Kingdom & Ireland, Mainland Europe and Rest of World. Services provided by each segment are permanent recruitment, contracting and outsourcing. The Company provides executive search, interim management and leadership consulting services. Its leadership services include board evaluations, management development, audits, assessments and strategic human resource (HR) consulting. Its professional recruitment services include technology recruitment business and recruitment solution business. Its offshore services include projects and software services, which provides application development, third party software maintenance and outsourced software services to clients across the world, and managed services/business process outsourcing. more »

LSE Price
128.5p
Change
0.8%
Mkt Cap (£m)
n/a
P/E (fwd)
n/a
Yield (fwd)
n/a

Utilitywise plc is a United Kingdom-based business energy and water consultancy. The principal activity of the Company is of an intermediary for energy supplies to the commercial market. Its operating segments include Enterprise and Corporate. The Enterprise segment is engaged in energy procurement by negotiating rates with energy suppliers for small and medium-sized business customers throughout the United Kingdom, the Republic of Ireland and certain European markets. The Corporate segment is engaged in energy procurement of larger industrial and commercial customers, often providing an account care service and offering a range of utility management products and services designed to help customers manage their energy consumption. It provides energy management services, including procurement, energy reduction and audit, carbon offsetting, smart metering, water brokerage, design, manufacture and supply of timers, controllers and building management systems, and the Internet of Things. more »

LSE Price
1.9p
Change
 
Mkt Cap (£m)
n/a
P/E (fwd)
n/a
Yield (fwd)
n/a



  Is LON:PURP fundamentally strong or weak? Find out More »


51 Comments on this Article show/hide all

Ben1 29th Jun '17 32 of 51
3

Having fairly recently been a buyer, what the high street agents say they do, isn't what they do in practice. the number of times we went to a viewing and the vendor was annoyed that the agent hadn't turned up. We even turned up to one viewing (with emails to confirm it had been arranged with the estate agent) and the vendor knew nothing about it! How many people go round looking in estate agents windows nowadays? The perception you get is that they add little value.

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bestace 29th Jun '17 33 of 51
2

In reply to post #196771

I wasn't so much making a point about the valuation of the company, rather I was responding to your assertion that they are not a high margin business. If you're trying to come up with a valuation you would surely include something for Australia, and maybe something for the USA.

If you want to bump up overheads to 20% of revenue on my pro forma figures, you get to EBITDA of £25m which is still a reasonable margin of 20%. I don't hold a position in Purplebricks (LON:PURP), but I think you are missing the point by focusing on the 1.7% EBITDA margin achieved last year, and I think you're still ignoring the benefits of operational gearing when it comes to overheads.

Final point - is it "very bullish" to think they might reach £124m of UK revenue by FY19, which is the implied revenue based on my pro forma figures? They're guiding to £80m UK revenue in FY18 which is an increase of 85% compared to FY17. To get to £124m in FY19 would therefore require a growth rate of 55% in FY19, i.e. a considerable slowing down compared to FY18 and FY17. It doesn't seem implausible to me that they could comfortably exceed that growth rate if the chips fall their way.

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tabhair 29th Jun '17 34 of 51
1

First of all, I didn't give you that thumbs down, you make fair points. The 1.7% margin is what's tangible in the here and now, and it's based on this company having significant market share and being a market leader. If the company makes no money in this position, then I think it's a huge, huge stretch to expect them to do the sort of numbers your're talking about with a degree of confidence. I am not saying they can't, I think they possibly could, but even then this company is still only catching up to fair value.

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LongbeardRanger 29th Jun '17 35 of 51

In reply to post #196835

I think Purplebricks is a very interesting company. I think it's going to have a potentially big effect on competition in estate agency and that effect will basically be to drive down fees. So that will be good for consumers, but overall bad for agents.

But I think there are also some clear limits to the scalability of Purplebricks' business. Clearly, their advertising spend has an element of scalability in it. But, they will need to continue to recruit agents (I am sceptical of the term "local property expert") as they grow. And, I think the current forecasts implicitly assume that there will be no response from traditional agents. I think that is really quite unlikely. I think traditional agents will (be forced to) cut their fees and this will curb Purplebricks' growth.

The estate agency industry is not obviously, to me, a winner take all market, unlike the portals such as Rightmost, or indeed other advertising or internet businesses, such as Auto Trader or Google. All of those businesses genuinely do have essentially zero cost growth, as well - so are clearly superior businesses to Purplebricks. In my view at least.

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LongbeardRanger 29th Jun '17 36 of 51

In reply to post #196839

Also - I'm sceptical of the prominence they give to Trustpilot. For that kind of valuation I would like to see hard numbers (cash), not their internet review scores.

I would give this much more credence if it was a recognised measure like the net promoter score.

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kalkanite 29th Jun '17 37 of 51
5

I sold my house through Purple Bricks a couple of years ago. They charged £750 to sell my 4 bed detached house in the SE, we didn't have to pay up front as we agreed to use PBs own online conveyancing. I wouldn't use their conveyancing services again as our designated person was extremely difficult to get hold of.

The fee of £750 was about 17% of what I would have had to pay an estate agent. The PB agent was very competent, doing a couple of the viewings (it sold quickly) and always answering his phone using my first name so overall a good experience at a very cheap price.

I asked him how PB was able to do the service at such a low cost. He said that they had found a loop hole in the Rightmove charging structure, this was due to PB having just one office with all services carried out by agents, therefore PB was paying in effect for one estate agents office but covering the whole country. This in effect means that other estate agents were subsidising PBs Rightmove exposure. If this is still the case, and PB are taking an ever increasing share of the market, I can see more and more estate agents going to the wall. With Rightmoves dominant position in the online market, it wont be too long before they will change their terms and conditions to something like a per property charge. This would increase PBs overheads considerably.

I think the current market price of over £1bn is absolutely bonkers. Yes PB is changing the market for selling houses but to imagine that they have any kind of moat due to marketing spend or presence is illusionary.


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Modform 29th Jun '17 38 of 51

Paul, another company reported yesterday was CRPR, profit up almost 50%, their fibre business is a real moat.the mcap is about 160m, the chart is the most bullish one comes across.

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dscollard 29th Jun '17 39 of 51
3

nice up tick in Purplebricks (LON:PURP) today , bit of a honey badger in today's market . Fist time since December 2016 that UKX, NMX, MCIX, SMX, AIM and TASX all closed below their 50 DMAs. Of the 37 NMX sectors only 4 are bullish. Might be time for the swoon ....

Website: runprofits.com
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paraic84 29th Jun '17 40 of 51

In reply to post #196715

The point that many make about them becoming the largest very soon (probably this year) is based on number of customers rather than revenue.

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gus 1065 29th Jun '17 41 of 51
5

As I recall, Utilitywise (LON:UTW) is more than 29% held by Neil Woodford's various funds. In the past he has been pretty supportive of management despite the share price dropping from recent highs around the 200p level which up until today has served to underpin the price. I can't realistically see him wanting to take any more on (potentially triggering a mandatory bid) so he'll either need to stick with it or look to exit. If the latter, this will be at a fire sale price well below even today's heavily marked down level. Anyone tempted by this as a value opportunity might like to consider this before exposing their fingers to the falling knife.

Gus.

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dustyie 29th Jun '17 42 of 51
3

In reply to post #196875

Utilitywise major share holders seller list below

http://investors.morningstar.com/ownership/shareholders-selling.html?t=UTW&region=gbr&culture=en-US&ownerCountry=USA

Look like he(Woodford) is already selling out

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harvs19 30th Jun '17 43 of 51
1

Does anyone know how the purplebricks LPE's are remunerated? I've been having a quick search but unable to get a clear picture of how this works. The reason I'm asking is because purplebricks' strategy is to eventually have 'ultra local property experts' controlling a smaller post code area and providing customers with a deeper understanding of their local maket. Obviously this is a plus for the customer but my concern is how would this affect the LPE's earning potential if they are in control of a smaller area? Are they going to be able to make a good living out of controlling a small postal code area of properties where they are presumably earning only a small commission of each instruction ? As I said, I'm not sure how the remuneration works but assume they take a small commission from instructions on top of a basic salary but would appreciate if anyone could clarify.

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gus 1065 30th Jun '17 44 of 51
2

In reply to post #196883

Thanks dustyie.

My original figures came from the company website, which I see from the footnotes hasn't been updated since April 4th (prior to the sales reported on your Morningstar link from April 30th).

https://www.utilitywise.com/investor-relations/share-information/

Looks as though Hargreave Hale have been a seller as well at the end of 2016.  After yesterday's profit warning not sure who the future buyers might be if they both look to sell down further.  At least now that Woodford is down to 17% he has headroom to buy more if he decides at these lower levels it is a reasonable contrarian play.  He's not averse to backing his own judgement against the market.

Gus.

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cig 30th Jun '17 45 of 51
1

In reply to post #196791

Established industry leaders sometimes do win by adopting disrupters' tactics and obliterating them, e.g. ISPs vs. incumbent Telcos (remember Demon Internet?), most car challengers vs. blue-chip carmakers (remember Swatch's car?), etc.

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steviej 30th Jun '17 46 of 51
1

In reply to post #196891

The last Holdings RNS I can see for Utilitywise (LON:UTW) is:
http://www.stockopedia.com/share-prices/utilitywise-LON:UTW/news/reuters/reg-utilitywise-plc-holdings-in-company-urn:newsml:reuters.com:20161216:nRSP0681Sa/

or

http://www.investegate.co.uk/Index.aspx?searchtype=2&words=utilitywise

Which has Woodford at 29.01%.

The only updates since are Director Dealings and Total Voting Rights.

So unless the RNS is incomplete/missing then Morningstar is wrong and the company website correct

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abgstock 30th Jun '17 47 of 51

Hi Paul,

I am interested in your comment on Utilitywise: "I think all investors should have a point on their checklist, to ensure that debtors are not more than c.60 days sales (inc. VAT). Also look for other, stray debtors, not just trade debtors. Both Globo & Quindell were obviously bad..."

Can you please tell us how you calculate this metric?

Thanks.

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JohnEustace 30th Jun '17 48 of 51

In reply to post #196887

My understanding is that the Purplebricks (LON:PURP) local property experts are self employed and earn commissions per listing. It's more like a franchise model but the local experts don't have to pay to buy in to it.
They advertise potential earnings in the £45k+ region and I have seen claims some make up to £95k pa. Being self employed they will have to deal with their own admin etc. and won't get any holiday pay or other benefits.
I think they get around £330 to £500 per listing depending how many of the add on services they sell and whether it's in London or outside.

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paraic84 2nd Jul '17 49 of 51
1

In reply to post #196999

Useful to know thanks. I think any firm having a lot of self-employed workers needs to keep half an eye on the Taylor review on modern employment practices commissioned by the Government. It's due to report this month and could make recommendations which affect companies like Purplebricks (LON:PURP), Uber etc.

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Reynart 2nd Jul '17 50 of 51

In reply to post #196943

Divide the debtors by 1.2 (to extract VAT) and then take the net amount, divide by annual turnover (which is always stated net of VAT) and multiply by 365. So £2.4m of debtors would equate to 61 days sales if annual turnover was £12m. (2.4/1.2/12*365 = 61).

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abgstock 4th Jul '17 51 of 51

In reply to post #197143

Thanks

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About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for Stockopedia.com on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »

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