Small Cap Value Report (30 Jan 2017) - CVR, SPE, WTM, FLYB

Monday, Jan 30 2017 by

Good afternoon,

I haven't made the final decision about which stocks to cover, so please shout in the comments if you'd like me to mention something. Thanks!


Conviviality (LON:CVR)

Share price: 260p (unch.)
No. shares: 172.5m
Market cap: £449m

Half-Year Results for 26 weeks ended 30 October 2016

I have written very cautiously about these shares before, and I'd remain very cautious here, after today's results.

The group swings into pre-tax profitability of £7.4 million (up from a loss in H1 last year).

Ne debt is 1.2% below "pro forma net debt" (that will have been a tricky calculation, following on from a series of acquisitions), and is now £138 million.

And how about this covenant situation:

Leverage is comfortably below the Adjusted EBITDA bank covenant of 2.50x at 2.19x  

At 87% of the maximum, it's comfortably below? Really?

Still paying dividends:     

Interim dividend up 100% to 4.2 pence (H1 FY16: interim dividend 2.1 pence), which is currently expected to represent approximately one third of the anticipated full year dividend.

That 4.2p dividend is worth £7 million in total, so it's the entire pre-tax profit figure.

It's a big statement of confidence to suggest that c. £21 million in dividends could be paid out in total this year.

Interest costs added up to £2.7 million in the period. This might not seem much against the market cap or the near-£800 million in revenues.

My opinion: I don't think there is anything comfortable about the leverage here for what remains a low-margin business.

In that context, I don't understand how the dividend policy makes sense - it needs more breathing space for its covenants, in my view.

Management are heavily incentivised to grow EBITDA (contributing to a max 100% salary bonus for the CEO) and to grow EPS on a 3-year timeframe via the LTIP.

The shareholder base has obviously signed off on these policies, so in aggregate it must be content, but it looks to me as if management are incentivised to shoot for the moon -  with all the attendant risk which that involves.

For these reasons, I view the low PE ratio and the dividend yield as value traps.

This Stockopedia table helps to illustrate some weak quality statistics:


Sopheon (LON:SPE)

Share price: 380p (+13%)

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All my own views. I am not regulated by the FSA. No advice.

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Conviviality Plc is a wholesaler and distributor of alcohol and impulse products serving consumers through its franchised retail outlets or through hospitality and food service. The Company's activities consist of the wholesale and retail distribution of beers, wines, spirits, tobacco, grocery and confectionery within the United Kingdom to both the on-trade and off-trade market. Its segments include Conviviality Retail, Matthew Clark and Peppermint Events. Its Conviviality Retail is a franchised off-license and convenience chain with over 370 Franchisees and over 700 retail stores trading primarily under the fascias of Bargain Booze, Bargain Booze Select Convenience and Wine Rack. Its Conviviality Direct is an independent wholesaler to the on-trade, serving over 23,000 outlets from national hotel chains to independent food-led pubs and restaurants trading through two businesses, Matthew Clark and Bibendum. Its Conviviality Trading is a full service brand and wine agency. more »

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Sopheon plc is a United Kingdom-based company, which is engaged in the provision of software and services in the product lifecycle management (PLM) market. The Company operates in two segments: North America and Europe. Its Accolade solution provides integrated support for innovation planning, roadmapping, idea and concept development, process, project, portfolio, resource and in-market management. Its offerings include alignment of long-term innovation plans with market requirements, industry regulations, and supply chain capabilities; generation and development of ideas and concepts to fill gaps relevant to achieving strategic initiatives; process and project management that tracks and enables decision making, focused on evaluating projects associated with innovation initiatives, and data management, analytics and integrity tools. Its subsidiaries include Sopheon Corporation, Alignent Software, Inc., Sopheon NV, Sopheon UK Ltd and Sopheon GmbH. more »

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Waterman Group plc (Waterman) is a United Kingdom-based holding company that offers a range of engineering and environmental services. The Company, through its subsidiaries, is engaged in the provision of design services and advice in the fields of civil, structural, mechanical and electrical engineering together with environmental, and health and safety consultancy. Its segments include Property, and Infrastructure & Environment. The Property segment consists of the United Kingdom structures and building services consulting businesses, which are involved in development projects both in public and private sectors. In addition, this segment includes its overseas business in Australia, Ireland and Poland. The Infrastructure & Environment segment comprises Waterman's civil, transportation and environmental consulting business, which trades as infrastructure and environment consulting and Waterman's highways and transportation outsourcing business, which trades as Waterman Aspen. more »

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  Is Conviviality fundamentally strong or weak? Find out More »

38 Comments on this Article show/hide all

David Brightside 30th Jan 19 of 38

Any chance please of a look at Porvair (PVR)? Interesting little smallcap - results just out. Thanks

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martinthebrave 30th Jan 20 of 38

Graham, I have held Sopheon for about a year. The reason revenues are flat while margins are on the rise is because of the progressive move to a SAAS licensing model.

Quote from Half Year report Aug 2016: "we are seeing rising evidence of prospective customers considering our private cloud software-as-a-service (SaaS) licensing model, rather than the traditional perpetual model that has characterized the majority of our business to date. This bodes well for the development of our recurring revenue base but could have an impact on up-front revenue recognition."

These results were outstanding IMO!

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FREng 30th Jan 21 of 38

In reply to David Brightside, post #19

David. You mean £PRV 

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Graham N 30th Jan 22 of 38

In reply to FREng, post #11

Cheers FREng

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Graham N 30th Jan 23 of 38

In reply to johnrosier, post #15

Thanks for the fantastic comment and best of luck with the position, John!



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Graham N 30th Jan 24 of 38

Sorry for failing to cover ATQT, FTC and PPHE! Appreciate the requests though.


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laurie 30th Jan 25 of 38

Re: SPE substantial dilution?


Monday 21 March 2016



Sopheon plc ("Sopheon", the "Company" or the "Group") announces that it has reached agreement with the holders of its convertible loan stock to defer maturity from 31 January 2017, to 31 January 2019.

In 2009 and 2011, the Company issued a total of GBP2m of convertible unsecured loan stock (the "Loan Stock") to a group of investors including members of the Board and senior management team. The Loan Stock was due to mature on 31 January 2017. The holders of the Loan Stock have now agreed to extend the maturity date of the loan stock by two years, to 31 January 2019. The conversion price of the Loan Stock remains unchanged at 76.5p per ordinary share. The interest rate of the Loan Stock remains unchanged at 8 percent per annum. Board members with an interest in the Loan Stock are Barry Mence (GBP640,000), Andrew Michuda (GBP45,000), Arif Karimjee (GBP27,000) and Stuart Silcock (GBP200,000). The current substantial shareholder in the Company with an interest in the Loan Stock is Rivomore Limited (GBP640,000).

The extension of the maturity date of the Loan Stock constitutes a related party transaction for the purposes of AIM Rule 13. In accordance with the AIM Rules for Companies, Daniel Metzger, as the director independent with respect to this transaction, having consulted with the Company's Nominated Adviser, finnCap Limited, considers that the amendment to the terms of the Loan Stock is fair and reasonable insofar as the Company's shareholders are concerned.

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Ramridge 30th Jan 26 of 38

In reply to laurie, post #25

Re. Sopheon (LON:SPE) Convertible Loan Stock Amendment

I think the amendment has no immediate impact on dilution as far as I can tell. Here is the rationale.

The reports & accounts say
" For the purpose of calculating the diluted earnings per ordinary share (i) the group's convertible loan stock is treated as converted at 1 January 2016, with earnings adjusted for the amount of interest that would have been saved, and the number of shares adjusted by the number issued on such conversion, ...."

Since the terms of loan stock contract have remained unchanged except for the extended maturity date, the diluted earnings per share on February 1 is exactly the same as the value on 31 Jan.

I picked this stock up at 122p in June last year, so a very happy long term holder.

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Beginner 30th Jan 27 of 38

For anyone considering a dabble in Flybe (LON:FLYB) , a colleague's son was formerly a pilot for them. He left recently to work for an air cargo firm. He mentioned rats and sinking ships!

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Funderstruck 30th Jan 28 of 38

Thanks for your comprehensive report on SPE. It is interesting to see that it has been in existence before 1996; Blew up then collapsed in Dot Com Boom , revived a bit to 2004 then started to fall again well before 2007 collapse which continued for them until 2015; then after just one year has suddenly revived yet again. The reasons they give are understandable but it seems a very big rise after such a long time ; does anyone have a better handle on the company ; what they really do and why has it taken so long for their products to be recognised ,seeing how long they have been around. Also like to know from those who hold it the reasons for buying back in Mid 2016. Many thanks

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melody9999 30th Jan 29 of 38

Graham - seemingly a good TU from INSE Inspired Energy today so wondered if you could cast your eye over this one?

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gus 1065 30th Jan 30 of 38

In reply to Funderstruck, post #28

Hi Funderstruck -

In answer to your final comment, I bought in to Sopheon (LON:SPE) just after the Brexit vote in early July 2016. It seemed to be one of the few small cap stocks to be stable/ticking up in the immediate aftermath of the vote and I purchased a line of stock into my NAPs portfolio given the high rankings at the time (SR 99, V 83, Q 93, M91).

These rankings have been consistently high since and although the share price has had a few wobbles from time to time, compared to an entry price of 121p I am well up on the game. With hindsight I probably should have topped up but still not entirely sure of what exactly the company does!



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AlanJenkins2 30th Jan 31 of 38

Thanks for covering WTM,Graham.Do you like it as an investment though ? You've sort of danced around that !

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Choclog 30th Jan 32 of 38

In reply to johnrosier post 15.

Sorry John, fat fingers have intervened - meant to give you a thumbs up not down ( I blame in on the Pinot Grigio. I know it's sad, but it is a Monday). My apologies. Hope Stocko can remedy.

Thanks Graham for your detailed reports, you add a further dimension to the already awesome SCVR.

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Piecesof8 30th Jan 33 of 38

In reply to gus 1065, post #30

Hi Gus and Funderstruck,

I would think of Sopheon (LON:SPE) as a SAAS service like salesforce.

Salesforce is delivering enterprise CRM through sales and service automation and marketing database and campaign management.

Sopheon is enabling enterprise innovation which in its simplest form is ways to manage the capital allocation and priority projects that a business invests in across the enterprise and automating the end to end workflow through the different teams and stages to make them happen ... ideally fast, on time and on budget!!. Solving problems like this effectively and quickly is how businesses today are winning in making better websites, brining better products to market, creating efficiencies or becoming more agile.

I work for a global ecommerce company who's has invested billions $ in changing its structure, ethos technology and processes to prioritise investments in a data driven way, to drive constant test and learn and innovation through the business so that we can win and improve faster than others. This is bloody difficult to replicate even on a small scale, but a platform like Sopheon opens up a lot of these capabilities to smaller companies or legacy companies wanting to become more agile on a modular basis or across the enterprise. A low cost, light touch SAAS model means it has a very low barrier to entry for customers to start using it and then get hooked. Very compelling IMO!!

Key step up in my confidence is getting stats on new vs existing customer revenue growth and usage ... could become very sticky just like salesforce.

Happy holder!

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TangoDoc 31st Jan 34 of 38

How delightful it was to see a confirmation of my own sense of disquiet about CVR. The company may well continue to do very well but I have the very same concerns about the core value. Having made a resounding profit, I cashed out today and set a buy-back alert of 203. Now I ought to find another Consumer Defensive to rebalance the portfolio but I have a sense that more troubled times may be looming fast for the entire market so I shall not rush into that.

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Funderstruck 31st Jan 35 of 38

In reply to gus 1065, post #30

Hallo Gus;
Thanks for the reply. Faith in the Stocko numbers certainly paid off here. interesting to see that since you bought the Q has inched UP due to big improvements in Roce ,ROE & doubling of margin. I agree about the business description , it struck me as Gobble de gook; put me off as seemed they have difficulty in clearly describing what they do.
Cheers Tony.

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Funderstruck 31st Jan 36 of 38

In reply to Piecesof8, post #33

Thanks Piecesof8,
for the explanation, as an Octo I am not abreast of current CRM methods which clearly utilise the very latest of technology to run the leading edge of the company. The capability of the clients for this system would be crucial for it's implementation or is that done jointly with Sopheon ?
Cheers. Tony.

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gus 1065 31st Jan 37 of 38

In reply to Funderstruck, post #35

You're welcome Tony.

Taking this example into a wider context, Sopheon (LON:SPE) is one of several small-ish positions that I have bought into on a combination of Stockopedia number crunching and limited company due diligence to complement my usual approach of thoroughly researching and then taking a larger position on targeted stocks (usually trying to adopt a Q & V type approach).

Many of these factor picks are companies I had never heard of before screening them through Stockopedia so at the very least it has helped with my portfolio diversification. Rather than hunting big game all the time, I've tried being a "factor farmer" as well. So far the dual approach seems to be working quite well. Not all of these factor based picks have succeeded, but law of averages seems to working so far and this particular bit of the portfolio is up about 20% in the last 12 months or so. Jury is still out (not really seen what happens in an extended bear market yet), but so far this natural sceptic is quite impressed.



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Piecesof8 1st Feb 38 of 38

In reply to Funderstruck, post #36


That's why they have their own large integration service and business process service teams but are now expanding to integration and consulting channel partners who help companies implement and gives them more scale .... early days with the latter hence interesting growth ahead. Also it is fairly easy to just pick up and use as lots of templates and workflow already off the shelf if you start small and focussed.

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About Graham N

Graham N

Full-time investor and independent analyst. Prior to this, I spent seven years in the financial markets as an analyst and institutional fund manager. I'm CFA-qualified and hold an audited, FTSE-beating investment track record.  Away from finance, my main interests are recreational poker and everything to do with China, especially Mandarin Chinese. more »


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