Small Cap Value Report (4 Nov 2016) - BOTB, GATC, HFG, DIA, QRT, SVCA

4th Nov '16 by Paul Scott

33 comments 24125 reads

Good morning!

I'm starting early today, to catch up on the backlog from yesterday.

There's only one trading update (and no results statements at all) in my universe of stocks this morning, a rather pleasing update from BOTB, so let's start with that.

Best of the Best (LON:BOTB)

Share price: 212.5p
No. shares: 10.1m
Market cap: £21.5m

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

Trading update - covering H1, the 6 months to 31 Oct 2016. This sounds encouraging;

Best of the Best plc, which runs competitions to win luxury cars online and at retail locations, is pleased to announce that trading for the six months ended 31 October 2016 has been strong with profits before tax generated ahead of management expectations.

Revenues have been in line with management expectations and the proportion of online sales continues to increase.

Operating margins have improved and marketing investment in customer acquisition during the period was slightly lower than originally anticipated.

Ahead of expectations is always good, although it's an important distinction to note that this seems to have been achieved by containing costs, rather than top line out-performance.

Broker expectations have increased this morning. FinnCap has increased its EPS estimate for the current year from 9.1p to 11.3p. With the share price currently at 212.5p (before the market opens - I expect it will rise maybe 10% today, at a guess?) that makes the PER 18.8 times.

Next year's FinnCap forecast has gone up from 10.7p to 12.4p, giving an FY18 PER of 17.1 times. Although FinnCap does indicate that they've been conservative, giving scope for upgrades.

My opinion - this is a long term holding of mine. The reason I bought the shares, is because I see this as a unique business. It's built up a strong reputation from operating at airports for about 15 years. However, business is increasingly moving online. Therefore the PER could shoot up at some point, if the market recognises that there could be much more impressive growth in future from internet sales really taking off.

Imagine what sales could rise to, if a larger gambling company were to acquire BOTB, and put some serious marketing spend behind it? I sometimes wonder if management are being too cautious - they've created something special, but arguably haven't exploited its full potential yet.

Anyway, the advantage of a cautious approach is that it's profitable, very cash…

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Bushranger

4th Nov '16

To be fair, a personal loan and overdraft are not the same thing. An overdraft more closly resembles a 'payday' loan facillity. Overdraft fees have not all that long in the distant past also come under scrutiny and if I remember righlty some banks gave refunds as the charges were ruled as excessive. I looked at BOTB as Paul had mentioned it and am sort of kicking myself now after the rise. However I hesitated, for the same moral reasons Paul states he would not buy into a payday loan company. So many of the testamonials I read on the net were from customers who loved the competition, but, it was so sad reading how they spent hundreds of dollars a week trying to win.

Catstycam

Good evening Paul. Thanks for your continued hard work with your postings. I have just read your report from yesterday regrding GBG. I am not intending to comment much myself because for one it was yesterdays report and want to keep things more topical. You commented that GBG is not a bargain, which I agree is true; however looking at the fundamentals I believe it is a strong company with strong management. Profits are forecast to increase along with organic growth if not at their previous rate; so I don't see a lot to worry about, just a set back with the share price. Anyway, enough about GBG.

Paul - may I ask you a general question. If I look at a number of trades for companies, doesn't have to be a specific one, on a number of occasions I see many small parcels of shares traded at the same price, either a buy or a sell; perhaps 8, 9 or 10 parcels. The number of shares traded in each parcel are so small that individually they don't make sense. They are usually if not entirely shown as "A" trades. Can you throw some light on what these trades mean please?. Co-incidentally or not they seem to have a disproportionate affect on the share price movement. Should this be a reason to be anxious?, is it a sign of shorting?. I have tried to work it out myself but I can come to no obvious conclusion. I am sure others would be interested in your answer.

Thanks for your attention and regards

CM

Graham Neary

You're comparing apples and oranges there, Paul. Or maybe apples and bowling balls. A Barclays personal loan is usually several thousands of pounds (typically £7,500 - £15,000) and is repayable over 2-5 years. With that size and maturity, and with the credit rating which Barclays requires, of course they can afford to have a much lower APR. There are fixed costs and therefore there is operational leverage in the lending business (the more you lend and for longer, the lower you can charge).

I referred specifically to the Barclays overdraft, which is the type of small-value product which competes with an H&T personal loan or a payday loan. Many pawnbroking customers have already been turned down by their bank for an overdraft because the bank considers them too high-risk, but companies like H&T are willing to take that risk. Thanks to them, their customers are able to buy food, heating or a few Christmas presents even if they have temporarily run out of cash. And the products would not be profitable if the customers were not able to make the repayments.

The moral arguments of investing or not investing in a company I have noticed come up regularly on these threads. It is something I have had to think about. Im sure their are some invsetors who detach themselves from their investments and see them only as figures and ratios, profit and loss. As a private investor managing your own portfolio I think you are more acutly aware of what your buying into. Should you buy into a drugs company who is testing its latest drug on Orangatangs? re The companies mentioned in this post; I could Ironically see a situation where BOTB customers spend too much of their pay playing and have to go to H&T to cover their bills. Or H&T lending money that is then spent on BOTB!

peterthegreat

Thanks very much for the information on Gattaca Paul. It has made a big difference to my perception of the company now that I realise that the net fee income is relatively small compared to the revenues. This means that the profit margins are so much more robust. The company would do well to make this more widely known. I also wonder if the company is deliberately creating low public expectations as a safety first ploy even though, from what you say, some of its comments sound more optimistic. I always prefer companies that underpromise and overperform rather than vice versa. Also alot of recent comments on ethical considerations when investing. My opinion is that the large tobacco companies have probably caused a greater amount of suffering from their products than all the other "unethical" companies put together. However my view is that whether I invest or not will not make any difference to this, so I do invest in companies which I consider cause harm. However, I do oppose them in other ways by lobbying against them whenever possible and I think this has a much greater impact than simply not investing in them. I can think of one company which I have successfully taken legal action against because of the unfair way they treat their customers (including me) but I also hold their shares because one of the reasons their profit margins are so high is because they behave in this manner and, unfortunately, they are likely to continue to get away with it. I could mention their name but this might not be allowed so I won't, but they are pushing the legal boundaries rather than doing anything evil.

Paul Scott

5th Nov '16

It's not for me to push my moral views on anyone else.
However, if I find a company repugnant, then I'll say so. For me, H & T (LON:HAT) is a repugnant company, that is exploiting the poor. So I wouldn't enjoy the divis, I would feel guilty about receiving them. That's why, whatever people say, and how they try to argue that blue is yellow, it just feels wrong to me.

I've been down on my luck before, and had to claim benefits, and lived on the breadline, 3 times actually. So the worst thing people in that situation can get into, is debt. So I feel that facilitators of debt to the poorest in society, at scandalously high interest rates, are absolute scum. I don't know how they sleep at night.

You may take a different view, which is fine.

There is no comparison at all with Best Of The Best (LON:BOTB) - it's a fun competition, which has fair odds that you can work out from the accounts. I play the BOTB game because I enjoy it, and can afford to waste £20 a week on it. It's so exciting to see how near you get, and get booby prizes. Vastly better than picking some random ball numbers - how boring!

Anyway, each to their own!

Regards, Paul.

Crusty,

I've got to take issue with you here! You said;

I don't regard BOTB as a scam, but like many gambling companies it appears not to provide meaningful value for money to its customers in any sense, except of course the extremely few lucky ones. On the other hand it could be regarded as just another parasitical prey on the less intelligent. Bargepole for me I'm afraid.

I think that's an outrageous comment! People such as myself who enjoy playing the BOTB weekly competition, are not necessarily "less intelligent". I play the game because it's great fun, simple as that. I don't expect to win a car, and indeed I don't need a car, because I already have a rented one, which I rarely use.

If you have £20 spare in your pocket, and fancy a flutter, I'd much rather have a guess at where the head ball is on BOTB, than just picking boring old random numbers on the National Lottery - which has always seemed to me the most boring thing imaginable.

I'd bet on anything - which ant will be the fastest to traverse a piece of A4 paper! Anything, as opposed to magic balls rotating around a carousel.

" whatever people say, and how they try to argue that blue is yellow, it just feels wrong to me." - I sort of know this is just a gut feeling you have, Paul. No worries.

For anyone who doesn't have the same gut feeling, they can rest assured that H&T offers very competitive products in its niche and is one of the more responsible lenders in the marketplace.

shipoffrogs

"So I feel that facilitators of debt to the poorest in society, at scandalously high interest rates, are absolute scum. I don't know how they sleep at night."

But are those rates scandalously high?

They seem to be making a net margin of around 10% which seems very normal and suggests the rates are high because the write-offs are too.

janebolacha

I once knew very well someone who reportedly made millions out of being a fixer on defence equipment supply contracts. Yet this person always took a stand against the supposed immorality of gambling.

Concepts and constructs of morality and immorality vary greatly, often depending on personal interest.

rhomboid1

Where I grew up, an impoverished ex coal mining village, we had doorstep lenders (Greenwood?) whose rates were even higher , the usual pattern of events is that some people would permanently rollover small balances, and occasionally one of those would hit the limit and go to the unofficial lender of last resort. He was a scary guy who eventually ended up in jail for murder. In that light a regulated player like H&T isn't a bad option and the key thing to remember is that customers in this space are generally a nightmare to deal with as can be seen from the net margin H&T generate.

Tortoise investor

Thanks for flagging Gattaca (LON:GATC) Paul, looks interesting. One thing that puts me off slightly is that the CEO barely owns any of the company. According to morningstar he only owns 92,722 shares which seems like a ridiculously small holding. Although he has bought in 2013 and 2015 around the 500p mark. It'll be interesting to see if he boosts his holding. FYI Ric Piper, of Lakehouse (LON:LAKE) fame, is on the board of Gattaca (LON:GATC).

smatthews1

I do have a frustration with payday loan companies, so I'm not targeting h and t here as I think their pawn broking side of things is legitimate and fair.

But these extortionate payday loans do target the less fortunate, and most of the time people living beyond their means, and it creates a vicious circle of debt that has never been earnt. Someone somewhere is going to be paying for this debt, until one day the house of cards comes tumbling down again.

This is almost the same situation as the events leading up-to 2008 yet just on a smaller scale.

Crusty

Sorry to have ruffled feathers regarding BOTB. My aversion to such outfits concerns the easily swayed addicts spending much more than they can afford on obviously poor odds. Anyone who can afford to blow £20 a week on it well fair enough, after all it's only £40k over a working lifetime.

themagic85

Regarding Best Of The Best (LON:BOTB) , Trust Pilot has 75% of customer reviews as 5 out of 5 stars and a score of 9.1 out of 10 so I would assume the large majority of people are playing it because it is fun and good value for money..

I've never really used trust pilot so not sure how much relevance to give it but have started looking at a few companies recently that Paul has covered. £G4M gets similarly good scores with 88% giving it 5 out of 5 stars. Having used both companies recently I can see why they get good reviews. Topps Tiles (LON:TPT) on the other hand, a pretty lousy score of 4.2 out of 10.

Does anyone have any thoughts of using trust pilot / any other review system to gauge if a company is offering a good product / service for consumers?

I'm pleased to see SCS (LON:SCS) has a 9.2 score on trust pilot, I therefore think it is a great source of info on consumer facing businesses ...

AnonymousUser192020

6th Nov '16

Daily Mail had a sympathetic write-up on BOTB yesterday
http://www.dailymail.co.uk/money/cars/article-3894318/Do-people-win-supercar-giveaways.html
Comments not so positive, but who takes notice of those anyway?
Taken to extremes, one might argue that share trading is for some akin to gambling/ lottery, but that would be stirring a hornet's nest!

slartybartfast

I am very surprised that you feel that the protection of the populace against possibly unfair odds boils down to their ability to access and analyse accounts !

"There is no comparison at all with Best Of The Best (LON:BOTB) - it's a fun competition, which has fair odds that you can work out from the accounts. "

jraitt

slartybartfast
I am very surprised that you feel that the protection of the populace against possibly unfair odds boils down to their ability to access and analyse accounts !

I'll bet that more people have lost more money on the stock market than on BOTB perhaps because they cannot analyse accounts. I would also argue that BOTB has a lot less manipulation of the odds than those on the stockmarket. Do you want to protect everyone from a little innocent fun?

staverly

7th Nov '16

Small Cap Value Report (4 Nov 2016) - BOTB, GATC, HFG, DIA, QRT, SVCA

Best of the Best (LON:BOTB)

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Paul Scott

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