Small Cap Value Report (4 Mar 2016) - MONI, G4M, HAT, SGI
Good morning!
Just a small request. Quite often people ask me to look at particular companies that are reporting on the day, in the comments section below. Obviously I can't report on everything, so have to pick & choose which companies look the most interesting each day. So it really helps if, when asking me to look at a company in the comments below, people can explain why they think the company is worth looking at. Not only does that pique my interest, and make it more likely that I will actually look at it, but also it makes the comments section generally more useful, in that other readers can then take a look at the share too, and we can have a more informed discussion on it.
Also, it's handy if people can put the ticker or name of the company they are referring to, in all comments, as sometimes it can be difficult to ascertain which company someone is actually commenting on, where I have covered several in a report.
Monitise (LON:MONI)
Share price: 3.13p (up 44% today)
No. shares: 2,213.0m
Market cap: £69.3m
Background - this is a special situation, which I outlined here on 12 Feb 2016. It's a fallen star, which is now slashing costs in a desperate bid to stay afloat before the cash runs out. Whether there is any ongoing value in the business, who knows?
Possible disposal - today's announcement is interesting in that it highlights possible hidden value in the group, with the announcement having been triggered by a spike up in the share price.
Talks are at an early stage to possibly sell a non-core subsidiary, called MarkCo Media. I can't find anything at Companies House relating to this company. However, MarkCo's website gives details of the acquisition of the company by Monitise for £24.5m in confetti (Monitise shares) when they were 56p. Ooops, so a really bum deal for MarkCo's former owners. There is also an earn-out, which could lead to the issue of more Monitise shares.
It seems to have been close to EBITDA breakeven back in 2014 when the acquisition happened, so loss-making in proper accounting terms. However, who knows how things have progressed since? It seems to be a voucher, and ticketing type of company.
My opinion - this deal looks to me as if it might be the former owners of MarkCo wanting to buy it back, so that it's no longer tethered to a sinking ship, but that's guesswork on my part. As such the purchase price probably wouldn't be very much, a couple of million quid perhaps? But that depends on how it has traded since becoming part of the Monitise group.
Does this announcement justify a 44% jump in the price of the whole group? I don't know, as no indication is given as to what the sale price might be, if it proceeds. Although my hunch is that the sale price probably wouldn't be very much - voucher companies were a bit of a fad a few years ago, but many have since fallen by the wayside (although I note that Groupon shares have recently shot up).
All in all, I'm keeping half an eye on Monitise, and I think it's possible that a bid for the whole group might occur from customers who don't want it to go under? Although for me personally, it only gets interesting as a complete punt at around 1p per share or below. With so much uncertainty over whether it can survive, and deliver a viable business model at all, then a £69m mkt cap is far too high I think.
When one punts on special situations, it's important to base decisions purely on facts, and not let emotions, especially optimism, come into it. So you really want the potential upside thrown in for free, with the downside risk protected by net cash and/or other tangible assets. I don't see MONI as being in that category at a £69m mkt cap, it's still too high, as it's not clear what (if any) value there is in the group. It would be good to go through the Annual Report, to find out what other subsidiaries the group owns, and then check them out online. There could be some other non-core assets within the group that might be sold off?
Gear4music Holdings (LON:G4M)
Share price: 141.4p (up 7.5% today)
No. shares: 20.2m
Market cap: £28.6m
(at the time of writing, I hold a long position in this share)
Trading update - this looks a positive update today, key points;
Very strong rise in LFL sales, at 46%, for the 12 months to 29 Feb 2016, which looks to have come in ahead of broker forecast of 36% growth
This has resulted in revenues and profits for the financial year being at the higher end of the Board's expectations.
Looks interesting. Looking back to the interim results, here are a few comments;
It's selling generic product (musical instruments & equipment), so the gross margins are very low - only 26.5% for the half year to 31 Aug 2015. So this is a box-shifting business basically, through a website. Compare this with the gross margin for online fashion, which are 40-60% - much more interesting.
Lots of competition. I asked a family member, who is a professional musician, to check out the company's website, which he had not heard of before (despite them claiming to be the UK's largest of its type), and he said it looked good, well-designed, with a wide product range. Trouble is, people buy on price, so will shop around for the cheapest deals. That means permanently low margins.
High inventories - a wide product range means you have to hold a lot of stock, tying up capital, but also incurring holding costs due to warehousing, staff, insurance, etc. Not great when gross margins are low. This company has almost 30,000 product lines, so there's lots of risk there, and not enough profit margin to absorb write-downs for slow-moving stock.
Marketing costs - this is the big killer for online retailing. It's easy to set up an online retailer, but you then have to drive customers to it, by spending big bucks on marketing. The last interims show that G4M spent 9.4% of sales on marketing. That's over a third of its gross margin of 26.5%. Having said that, it's marketing which drives the growth, and if you get big enough, you can then out-spend smaller competitors, and hoover up market share. So it looks as if G4M might be on that path, given its strong LFL sales growth.
Profitability - it was still (slightly) loss-making at the interim stage. So nothing to get excited about here, and it makes the company difficult to value.
IPO proceeds of £10m seem to have been used to pay down debt, and buy more inventories, so there isn't much cash on the balance sheet.
IPO risk - we've all seen numerous examples of smaller caps that have gone disastrously wrong within 18 months of IPO. So I am inherently distrustful of IPOs. They're either a time-bomb in terms of something going wrong (e.g. DX Group, Entu), or they're over-priced! Therefore I am extremely cautious of anything which was an IPO within say the last 2 years.
My opinion - I always like to explore the downside case first, before getting excited about the upside, as that helps keep me grounded, and avoids over-paying for things.
Overall, I feel that the market cap of £28.6m is over-valuing the business for where it is now. However, despite this, we hold a few shares in a family portfolio (which I always disclose at the top of each section under a generic disclosure of "I hold a long position....". I might change that to "My family..." actually, to make it clearer, but it's splitting hairs really).
The reason we have a few shares in this company is for the long-term potential. If strong growth continues, albeit at low gross margins (so limited operational gearing), then the company could get preferred deals with manufacturers, to raise its margins, get volume rebates, etc.
We're all creatures of habit too. So if we consistently get good value, and service, from a particular website, then after a while a lot of us stop shopping around, and just go to our preferred website, especially when time is short, or when ordering consumables (such as reeds for wind instruments).
I'd like to meet management actually, and maybe visit their H.O., it would be interesting to find out more about the people & logistics behind it.
As there's nothing else of interest today, I'll look back at a couple of companies that readers have expressed an interest in.
H & T (LON:HAT)
Share price: 195p
No. shares: 36.9m
Market cap: £72.0m
Results y/e 31 Dec 2015 - for background, I last reported on this pawnbrokers here on 18 Aug 2015 at the interim stage.
Results are pretty good. Actual EPS of 14.9p looks to be slightly below broker consensus of 15.0p, but pretty much in line. The PER is therefore reasonable, at 13.1.
Balance sheet - this remains very strong indeed, so this share really is copper-bottomed. You've got strong tangible asset backing, as well as a reasonable earnings multiple, which is unusual to get both together. That should make this a fairly low-risk investment. So good risk:reward, which is what we investors should be looking for.
The downside of this is that it's not generating a particularly good return from a large net asset base.
Dividends - a generous 67% hike in the final divi to 4.5p, gives a total of 8p for the year, so a healthy yield of 4.1%.
Regulatory risk - this is the biggest potential downside that investors need to think very carefully about. There is a section in the narrative about this.
Outlook -
The demand for small sum, short term cash loans remains strong and by increasing the range of assets it accepts, by expanding Personal Loans and Other Services both in-store and online we are ideally positioned to capitalise on this changing marketplace.
Our continued investment in stores, people and systems has provided a strong platform to support growth. Current trading is in line with management's expectations for 2016.
I would also like to add my great thanks to those of the Chairman, in recognising all our people whose skills, commitment and enthusiasm continue to drive our success, and who give us confidence in the future.
Valuation - brokers have pencilled in further earnings increases this year and next.
There's no doubt the valuation metrics do look good, providing of course there is no adverse regulatory shock;
I still haven't managed to bring myself to buy any, over ethical concerns. A friend has basically told me to stop being so silly, as it's better that people use a regulated, above board short term lender like this, in emergencies, than going to a loan shark.
Also, what's the difference between this, and any other lender? They charge more, but that's to reflect higher risk, and the overall results are not profiteering - the overall level of profit is perfectly reasonable.
So I'm warming to it, and can very much see the appeal. Although you could wake up one morning 30% poorer on this share, if a regulatory bombshell is dropped by this, or a future Government, or the FCA. Therefore you could argue that it probably should be on a modest rating to reflect this risk.
The Stockopedia computers love it too - the StockRank is an almost perfect 99.
STOP PRESS!
Stanley Gibbons (LON:SGI)
There's a holding announcement out today at 3pm re the current fundraising;
Further to the announcement made on 23 February 2016, the Group confirms that it is continuing the process to raise new equity finance.
The level of interest generated further to that announcement and from existing shareholders has been encouraging and the Group expects to be in a position to make a further announcement in the near future.
As previously announced, the Board intends that the fundraising will be executed in a manner that recognises the pre-emption rights of existing shareholders insofar as is possible.
I've been involved in emergency fundraisings before, and basically the big Institutional players can just name their price. So if they want to play hardball, then the discount can be pretty much whatever they want it to be.
Delays are never good news, so I suspect the discount on this fundraising might be greater than people think. 20-25p is my guess, but that is a total guess, I have not got any info, or heard any rumours even.
If pre-emption rights are respected, then it's not a problem - existing holders can just buy more in the discounted offering. But the words "insofar as is possible" above concern me.
In my view it's best for small shareholders to wait on the sidelines in this type of fundraising, just to be on the safe side. Anyway, let's see what happens. I think SGI is badly broken, and wouldn't go near it myself, a real can of worms I suspect.
Good, I'm done for the day, and the week.
I hope you have enjoyed this week's reports, and found them useful.
Regards, Paul.
(usual disclaimers apply)
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32 comments
Hi Paul. Re G4M, you were perhaps a bit downbeat. For example, on profitability, they were lossmaking in the first half as you noted - but only 0.1m at operating level pre exceptional - and more importantly they were profitable in their busier 2nd half last year (2014/15) to the tune of 0.85m pre-ex and will surely improve on that with the much higher sales level this year just ended (could do at least 1.5m giving a full year op profit of 1.4m). In addition, interest charges will be much reduced in 2015/16 as the IPO proceeds were used to eliminate the rather expensive loan notes from backer KCP. All in all, if they can continue to grow at current rates in 2016/17, and can maintain gross margins, you could be looking at a big jump in PBT and eps (maybe 10p or more). Maybe i'm getting carried away but also worth noting that pre-ipo holders including the founder and KCP sold almost no shares at IPO and virtually all IPO funds raised went into G4M. Does that mitigate your concern about IPO risks a wee bit? Still there is a lock up period expiring in a few months so some caution is perhaps justified.
Conclusion - music gear may not be a high growth market but on balance G4M certainly looks worth holding and worth following. Tx for covering it.
herbie47
Not sure that H & T rely on a recession to do well if this quote from their MD is anything to go by:
“One of the misconceptions is that people outside the business say that in times of recession people must be queuing outside the doors. Well that’s not the case because most people that are pawnbroking customers or are potential pawnbroking customers haven’t had normal credit, so they don’t look at the credit squeeze as you and I would.”
That said, when banks are drawing in their horns during a recession credit can be raised through unconventional collateral at a pawnbroker. For the time being H & T (LON:HAT) is rather rangebound.
Not sure about that, if you look at their operating profits:
2010 £28.6m
2011 £24.6m
2012 £18.1m
2013 £7.57m
2014 £6.22m
I don't have before 2010, as you can see the profits have fallen considerably in recent years. Some of that is due to price of gold. Gold price usually goes up in a recession. In recession more people lose their jobs, less people can repay their loans?
£H&T has been on my watchlist for about 1 year now but I have not pushed the buy button yet, mainly because the share price has not really moved (180-200p), I was tempted the other day to buy at 180p, but waited for the results which are quite good. I did pick up on this comment "H&T has traded well in spite of very difficult conditions. The market remains challenging and as the high street landscape continues to change, businesses which fail to adapt will continue to struggle. We have built a robust infrastructural platform which, when combined with the development of new products and the solid performance of our core businesses, means we are increasingly well placed in this new environment."
So conditions are very difficult and challenging, I take it this refers to high street retail? Seems like they are taking action. So if they are doing ok in difficult times then that bodes well as long as times improve, I believe by improve get worse for most of us. Last recession they did very well, no doubt lots of loans and gold price soaring. I do agree with Paul's unease though, at the end of the day they will benefit from people's losses. A good share to have if there is a recession.
Regarding G4M , I live near York and my local broker got me a few shares in the IPO.
I visited the showroom in York , which is situated behind Tesco in a business park and not too easy to find.Definitely a destination , which is OK in the circumstances.
The showroom is full of a vast range of kit from complete started kits for kid's Xmas presents to top of the range.I would guess that stockturn is pretty slow. There is a proportion of own label as well as leading brands. I was the only person in the place for the half hour or so I was having a good look round and the one staff member there sat behind his desk and took no interest in me. No doubt he had me sussed out as not a potential buyer.
Looking at the figures they spend a lot of money on their website as well as promotion , and I felt they could do with more retail experience. A London showroom is going to be much more expensive and hopefully much busier than York , but will it actually add significant volume?
I decided on looking again through the Prospectus to sell my small holding as I felt that the share price was way ahead of prospects.
Just my personal view as an ex-retailer with tin ears.
GAN
I did wonder about the location of the York, does not strike me as being the best place for this type of business and costs. I would expect large cities like Manchester, Leeds, Birmingham to be more appropriate. Most of this type of gear is sold in pro music shops which tend to backstreet places, low overheads or online. It seems there are trying to sell this gear like hifi. With low margins I this is a concern.
Maybe a 2nd mouse share?
Paul,
Last October you disclosed that you held Dart (LON:DTG) and commented on it despite its being no small cap.
They published a Trading statement today indicating that trading was slightly ahead of current market expectations ( which seem to be for reduced profits going forward) because of lower than anticipated winter losses. Holiday bookings seem to be ahead of last year's position so they envisage a result broadly in line with last years results - which puts them back on an undemanding forward PER.
I continue to hold.
Hi Paul,
Many thanks for your comments on H & T (LON:HAT).
Reading on-line reviews by customers and the comments of staff regarding working for H&T I got the impression that they try to achieve a professional and ethical approach to both customers and staff. They seemed to be more highly rated than most of the competition. I like the fact that the MD has been there since 1997 and has skin in the game.
They got out of pay-day lending as they were not prepared to charge Wonga levels of interest once the cheque guarantee was withdrawn. They seem to be cautiously developing on-line lending and have a number of irons in the fire. The recent recovery of the gold price might add a bit more profit from this source over and above the generally optimistic sounds they seem to be giving out regarding current prospects. I topped up a small position I took following your last review after reading the recent RNS.
The report refers to debt reducing during the year from £9.7m to £2.1m which is encouraging. I suspect that any further regulatory intervention is likely to reduce competition rather than massively affect M & T's business. They do not seem interested in the sleazy end of the loans market.
Thanks again for your thoughts.
Hi Paul ,
Just read you comments today , well this is a share i love to get a second opinion from you or you readers out there, Arrow global group (arw.l) , it release it earnings this week
the numbers look good . Just wondering is this a high risk business and perhaps the low valuation
The link below is to the company history
Arrow Global Group Plc ( a company that purchase and manage debt portofolios,)
for 2015 pe 12.45, peg 0.77 for 2016 pe 9.45 peg 0.3 for 2017 pe 7.99 peg 0.43
http://www.arrowglobal.net/aboutus/ourhistory.aspx
regards
Francis
I can only speak about G4M as a customer, having continued to fund my son's rock god ambitions. The website is OK, but no more than that and a bit clunky. There is a lot of competition for the merchandise that they offer and IMHO they are not the cheapest across the board. The service feedback I received was also average (not poor, but not great). I would be worried about their competitive advantage and USP if I was looking to invest.
Re: Stanley Gibbons (LON:SGI) I'm very curious to know why Hendersons have bought so many shares recently, now have over 17% of the company.
Just a general observation. Its interesting that SGI deal in collectibles i.e. alternative non mainstream assets. Their balance sheet is bombed out and I wonder if that bodes ill for other firms that operate in the alternative assets world of classic cars and wine and the like. Im not sure of the identity of the firms that are listed. There are plenty in the private sector of course but of the assets themselves the 500k Aston DB5's and the Beijing Media (:1000) chateau Petrus I just wonder if we are close to the top of that particular bubble.
I believe Stanley Gibbons (LON:SGI) problems stem from the management trying to change an old fashioned stamp selling business into something more modern. The website took about 5 years to go live, then its not that good and cost £5m, that is crazy. Also many of the acquisitions they have made seem to be poor value, if you look at the costs and then disposable price. Also many of the high ticket items such as stamps the market because of China has almost disappeared.
But yes these firms are venerable to recession.
Pointless announcement of the day award goes to Stanley Gibbons who decided at 15:00 today to issue an RNS that says that further to the announcement that they were going to do a thing they are doing the thing they said they were going to do. Reassuringly they go on to reassure everyone that they'll make some more reassuring announcements in the near future.
"Further to the announcement made on 23 February 2016, the Group confirms that it is continuing the process to raise new equity finance.
The level of interest generated further to that announcement and from existing shareholders has been encouraging and the Group expects to be in a position to make a further announcement in the near future.
As previously announced, the Board intends that the fundraising will be executed in a manner that recognises the pre-emption rights of existing shareholders insofar as is possible."
Reminds of GBO.
Hi Paul and other Stock readers,
Thanks for the write-up of the H & T (LON:HAT) results which looked quite good.
On the balance sheet trade receivables look high (currently £50m) and this equates to 56% of annual revenues. I know previously you have said you would expect trade receivables to be around 25% of annual revenues. Would appreciate your or any other readers thoughts.
Best wishes,
Imran.
Hi Imran et al, with regards to H & T (LON:HAT) I agree that the results looked good and I was pleasantly surprised by the dividend which not only beat this years forecasts but also those that were in place for this year. On the balance sheet it looked quite encouraging with reduced debt levels down to a relatively low level and a book value of around 260p which puts them on a big discount to book value.
I guess this may always be the case as there may be some doubt about some of their assets and if they will be paid back. I think that is why the receivables are so high in this one given the nature of the business. I note this figure was down slightly on last year too so it has not suddenly spiked.
On the regulatory changes front this seems to have been beneficial for them up to now and they do say that there is a specific exemption for pawnbroking and certain other credit products at present. They do not expect the cap to apply to pawnbroking in the near term, but I guess, as Paul says, there is a risk that it could suddenly be included with a negative impact as we saw for example with International Personal Finance (LON:IPF) in one of their overseas markets late last year.
Hope that helps, I have not held this one in the past, but did take a small position after the results given the value, yield, growth prospects and the Stock rank of 98.
Jamie
Compoundincome.org
Thanks for your thoughts Jamie.
I feel G4M are being alittle short-changed here.
The music retail industry is highly fragmented, lots of sellers but no real big sellers dominating the market. They sell own-branded basic instruments and brand-name instruments. Importantly on Amazon you will not see Amazon selling much direct in their own name as the brands will not let instruments be sold in just an online environment, the retailer needs to have a phyical store to show off their product. G4M has a large premises in the North and will be opening one in London at some point shortly.
Having done limited investigation myself earlier in the year I found G4M to be cheaper than the other sellers on Amazon and elsewhere online and believe they are coming up favourably against the store-only retailers as well.
All in all I see them as a much better protected business than ao.com, much better valued at £26m v £35m turnover growing at 40% for the year ahead (based on old forecast). They actually going to report a profit up Feb 2016 giving a P/E of 45 falling to P/E 22 for Feb 2017 with great upside from a growing UK business and their already growing european markets from a much lower base with 19 international websites live.
What is not to like
Disclosure - holder and also a buyer today
They sell a lot more than their own brands, they do sell a lot of brands names that are on Amazon, just look at the studio monitors, however I don't think Amazon is the real competition here, there are many other pro shop chains, I know when I was looking an external DAC. Thomanns was the name I could not recall before and they are German, they were very competitive a year or 2 ago on gear like active speakers, not sure now with the £ falling. I would be interested to know the breakdown of their sales and profits, ie musical instruments v studio gear.
Agreed, only brands are a smaller area, most of their money will be from selling the brand names where they should have an advantage as they have volume when buying and less premises costs to pay for, with the one premises also jointly the distribution warehouse I understand.
Yes I agree re brands but G4M are very small so I'm not sure they will have an advantage when buying, had a look at Thomanns, they are the largest in Europe, revenue was Euro 525m (2013) so about x20 G4M.
Just a small request. Quite often people ask me to look at particular companies that are reporting on the day, in the comments section below.....So it really helps if, when asking me to look at a company in the comments below, people can explain why they think the company is worth looking at...
Hear hear Paul. Come on everyone, let's all contribute a bit. For some that means asking good questions, for others providing answers.
You are providing a fabulous and educational service here but people need to engage and not be passive. Some posters provide some really good insight and thought on companies but some just ask for your opinion which I suspect translates as "I've got some shares in this company. Please make me feel better!"
As a minimum, people should indicate the size of the company, what they do and where, what the results were and whether they under or over delivered broker or other forecasts and some sort of opinion with regards the prospects moving forward. I tried to provide some insight with regards DX and WTM a couple of days ago. OK, I had an opportunity to gather the info to do that but hopefully it was of use.
Perhaps we could move questions towards balance sheet or cashflow statements that you could take a 5 minute look at and suggest some explanations for....we would all learn more that way but it's not up to you to dig them out. It's up to us to do that and then you can do the explaining.
We've got a great teacher here everyone. Let's make use of him whilst he's available. We learn best by doing things though so dig into the detail, post what you find , ask a sensible question or two and we will all learn.
I agree with Paul on Gear4music Holdings (LON:G4M), I think margins will be thin and there's lots of competition, this is a shop for pros so you will not have the high margins you have on hifi, there is also quite a large online European company (Dutch?) I forget the name offhand, which are very competitive in this section. If you want cheaper hifi or accessories its well worth looking at pro gear.
I like G4M for the reasons you give, but haven't felt confident enough in future profits to buy at any share price I've seen it at. If I had more knowledge of the business fundamentals that might change, so I would be interested in your analysis if you get a chance to meet management.
banks would probably squeeze it a bit more till it bursts then get the bits they want out of administration, then award huge bonuses and LTIPs to incentivise the new management (appointed by the banks from their own staff pool of course) to turn up at the office a few days a week.
Hi Paul
Re. Gear4music Holdings (LON:G4M) Current broker forecasts based on £33m forecast revenues gives a pe of 45.3. Today's update forecasts £35m revenues giving a forecast pe of around 43. A pretty rich valuation even putting aside current market jitters?
Regards, Ram
Hi Ramridge,
I think PER is not useful when trying to value companies which are at or near breakeven, especially when growing fast, like Gear4music Holdings (LON:G4M) is. In the short term the PER will be meaningless. It's more about looking forward a few years (we're looking 3-5 years on this one), and then imagining what earnings might be at that point.
With G4M I'm also warm to the fact that the market loves very strong organic growth rates. So it will put very strong growth internet retailers on a high multiple in the short term.
It's not a strong conviction investment, so we've sized our position in it to a smallish level accordingly. To put it in perspective, we've got about 10 times the amount invested in BOO compared with what we have in G4M!
Regards, Paul.
Re. Monitise (LON:MONI) - Interesting situation. Net Current Asset Value (NCAV) which basically disregards non-current assets such as intangibles, premises etc as worthless and subtracts total liabilities, comes to £76.4m - £63.6m = £13m in round terms. (1H2016 interims)
You could say that this is the fire sale value of MONI, which comes to 0.6p . The current price is a long way from this floor.
Premises? Any freeholds?
Hi Ramridge,
Indeed, and remember that cashburn is still high, but reducing, at Monitise (LON:MONI)
You're right to flag up the liabilities on the Bal Sheet though. The company likes to talk about its (dwindling) cash pile, but a lot of that cash is spoken for, and will have to be paid out settling liabilities on the Bal Sht.
I suppose the key unknown is what value its clients put on the company's continued existence, given that it provides banks with transactional software. If you were a major bank, relying on this software, and you saw that the provider was close to going bust, you might well decide to just buy it the company, to protect your own position. Mind you, I suspect banks might be too ponderous to think/act like that?
Regards, Paul.
From the website, it seems it's mostly front end stuff they do for banks (mobile apps and the like) which is not as critical as actual payment infrastructure, and should be easy to carve out in case of liquidation: the fees the clients pay for the apps are surely enough to pay a few programmers and UI designers, so they have no reason to buy the company outright. It would also be tricky for any bank to buy a service provider that's also used by other banks.