Small Cap Value Report (5 Apr 2016) - KOOV, BLNX, MOSB, IND, ADT

Good morning!

Apologies for no report yesterday. As usual, I'll catch up with the backlog later this week. Timeliness may not be my strong suit, but I hope my reports are usually interesting & worth reading, even if they're a little late.

Koovs (LON:KOOV)

Share price: 20p (up 16.5% today)
No. shares: 44.9m
Market cap: £9.0m

Trading update - given that fashion retail is my sector, I keep a close eye on potentially interesting shares. Koovs has been a car crash to date - it's got a very high rate of cash burn, and has run out of money basically. It's tried & failed to raise adequate funding, and instead has had to rely on a small amount of extra cash provided mostly by its own Directors. 

So this has to be seen as a very high risk punt, not really an investment at all. However, if they do pull it off, to become a big player in India's online fashion sector, then the shares could potentially become a serious multibagger. So I'm keeping an open mind on this one.

Today's trading update looks to me mostly like a PR release, to get investors excited about growth, to push up the share price before the next Placing. In fairness to the company, it has been completely open about the fact that it needs substantial extra financing, about 4 times the current market cap, to get to breakeven. That's a big ask, and so far there hasn't been any significant investor interest - in terms of actual money being stumped up. I'm sure there have been plenty of meetings, but no cash.

Today the company trumpets an 189% increase in sales, to £10.0m for y/e 31 Mar 2015. Sounds great, but make sure you read the little footnote, which says;

Gross sales order value placed through the KOOVS.COM website including taxes.  This does not represent the revenue of the Group.

Doing a bit of googling suggests that India has VAT rates which vary from state to state, and for different products. However, a rate of about 12.5% seems the norm for general goods, which might include clothing perhaps? If any readers can clarify on this point, that would be helpful.

However, a further deduction is needed, because Koovs has an unusual capital structure. The group holding company only owns 57.5% of the main operating subsidiary. So 42.5% of the value of the business is actually owned by someone else. I think this might have something to do with laws in India prohibiting foreign ownership of Indian companies? Again, am not entirely sure, not my area of expertise.

As it owns over 50%, the full subsidiary accounts are consolidated into the group accounts, but it's important to note the large "non-controlling interests" line on both the P&L and Balance Sheet.

Funding - the company claims this is on track. I don't think so! They have been trying to raise cash for months, to no avail. Perhaps there is something in the pipeline though?

As previously announced, the Company has plans to raise additional capital to invest in the growth of the business, which remain on track.

My opinion - there's a very high risk of this company going bust, as it's almost out of cash, and burning cash heavily. Therefore more discounted Placings are inevitable. The discount could be crushing for existing shareholders, we don't know.

Or, a white knight might come along, and decide that the growth opportunity outweighs everything else, and provide it with the cash it needs to continue operating. This is the trouble - the future for this company is binary, and there's no way of knowing which way it might go. So it's impossible to value the shares right now.

Blinkx (LON:BLNX)

Share price: 18.1p (down 14.7% today)
No. shares: 404.1m
Market cap: £73.1m

Trading update - the original business model here broke, once the nature of how this company made such large profits became known to its clients, courtesy of Prof. Edelman, an expert in the field from Harvard Business School.

So Blinkx has had to reinvent itself, using a big, but depleting cash pile. The shares are therefore a punt on whether they can build a good business from the wreckage of their last venture.

There are some potentially promising signs, although I find with this type of company, you have to take a lot of what they say with a pinch of salt, as it often doesn't stand up to scrutiny.

The key numbers reported today (relating to y/e 31 Mar 2015) are:

·      FY2016 revenues of $165-170M
·      FY2016 Adj. EBITDA loss of ($10-11M)
·      Cash and cash equivalents of $76M

Care is needed with EBITDA, as the company capitalises a large amount of development spending. So an EBITDA loss translates into a much larger proper loss, and of course cash burn. So these figures are very far from being good, and are despite the company having eliminated $40m in operating costs during the year.

I think the problem is that its new product lines are much lower margin than the old, unsustainable stuff they did.

My opinion - in my experience, bad companies only very rarely reinvent themselves and become good companies. So I'm highly sceptical about Blinkx, and this has been proven very much correct to date.

That said, there are some potentially interesting signs of progress - the new product lines are growing fast - up 66% in 2015. Also the group still has the luxury of a substantial cash pile. The figures will reveal more, when published in May 2016.

Moss Bros (LON:MOSB)

Share price: 100.6p (up 4.7% today)
No. shares: 101.0m
Market cap: £101.6m

Results, 52 wks ended 30 Jan 2016 - I'm impressed with these numbers.

Key points;

Like-for-like (LFL) retail sales up 7.6% in the year - this is impressive, as it's tough to achieve over 5% growth for a full year. This comes on top of +7.1% growth in 2014/15. Although I suspect this growth is being driven primarily by the store refit programme. The notes to today's accounts make it clear that refitted stores are treated as LFL - which they're not really, are they?

It's a pity that there isn't a standardised format for calculating LFL sales growth, as it can be massaged upwards, as in this case. I always used to exclude refitted stores from LFL sales calculations in my day as a retailing FD - after all, you expect to get 10-20% sales growth from a refitted store, otherwise there wouldn't be any sense in spending the capex to refit it!

The trouble with refits, is that they tend to give a boost to sales figures for a relatively short period of time, from the novelty value of a nicer fit-out. That slowly wears off after a while. So don't expect MOSB to continue delivering such strong sales growth once the store refit programme has been finished.

Gross margin - is strong, at 59.8%, and improved from the prior year's 58.3%.

Current trading - still pretty good, in what seems to be generally quite poor market conditions for clothing sales:

Group like-for-like sales, including VAT, in the first 9 weeks of the new financial year are up 5.2% with growth seen across in-store retail, e-commerce and hire. 

Pre-exceptional profit before tax is up 23.1% to £5.9m - good growth, but not a great profit margin, at 4.9% of revenues.

Dividends - this is a special situation, in that the company is paying out more than 100% of earnings as divis - the intention being to partially deplete the excess cash pile. That's fine, but it's important to bear in mind that divis not covered by earnings are not sustainable in the long run, so care is needed here before getting too excited about the high yield.

Total divis of 5.55p gives a yield of 5.5%.

Balance sheet - despite the big divis, and heavy capex, I'm impressed to see that cash has only fallen from £19.6m last year, to £17.3m this year.

Overall, the balance sheet is in very good shape, so no concerns here at all.

Valuation - all positive so far, but the trouble is, the valuation reflects all the positives. Underlying EPS (diluted) of 4.56p means that the shares are currently on a PER of 22.1 times. That's a very rich valuation for a business that probably has fairly limited growth potential.

You could argue that 17.1p of the share price is buying the company's cash pile. So that would take the ex-cash share price down to 83.5p, for a PER of a still punchy 18.3.

Brokers - Peel Hunt (who are excellent on research for retailers) estimate earnings growth of 15.8% in each of the next 2 years. So you could argue that this growth rate is close to the PER, therefore on a PEG basis the shares may not be quite so overvalued. There's always the risk though that forecasts are not achieved. After all, costs are going up for all retailers - especially the Living Wage, which is not a one-off remember, but a cumulatively large increase in costs.

My opinion - I think Next (LON:NXT) (in which I have a long position) is far better value, on a PER of about 12. It's also a very much higher quality business. So I don't see the attraction of MOSB shares in comparison.

Indigovision (LON:IND)

Share price: 130.5p (down 2.6% today)
No. shares: 7.6m
Market cap: £9.9m

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

Share price movement - I feel that IND's Board needs to issue a statement to the market, to reassure that business is not falling apart - which is the inescapable conclusion you would arrive at from looking at the share price chart.

However, this is a very bizarre situation - the company's largest shareholder, a friends/family fund apparently, based in Switzerland, called New Pistoia Income Fund, appears to be trying to dump its 29% shareholding in the company, in dribs & drabs, through the market.

This is incredibly foolish, because obviously it's killing the share price. If buyers can see from the RNS that there's a big, and clearly distressed seller in the market, then the logical thing to do is just sit on their hands and wait for the price to continue falling.

I keep in regular contact with the company, and subjectively the CEO seemed more perky than he has done for several years. It was pointed out to me that if the company was trading materially below market expectations, then they would have put out an RNS to say so, as is the requirement.

Nobody knows why New Pistoia is selling, but they seem to be exiting clumsily, and in a hurry, so it's probably down to redemptions. They're down to 23.8% now, so still a long way to go.

A new shareholder has appeared with about 4%, who is a former Brewin Dolphin staff member, which is IND's long-standing house broker. That's encouraging that someone who's been on the inside sees value in the shares.

I have no idea where the share price will bottom out - my guess would be about 100p. So probably like lots of other people, I'm itching to back up the truck & buy as many as possible if/when the price gets down to that level. This could be a very nice trade, as I suspect a very rapid rebound to perhaps 200p is on the cards once the overhang clears - assuming there's no bad news of course - IND has a seemingly infinite capacity to shatter the hopes & dreams of its long-suffering shareholders.

That said, it's got a smashing balance sheet, with net cash, moved back into profit in H2 of last year, and put out a positive trading update last month. So this could be a very nice trading opportunity at some point perhaps?

EDIT: I think that tax-selling, to realise a CGT loss before 5 Apr 2016 might have further exacerbated the precipitous fall in this share price. That effect has stopped, and may reverse now of course. The old rule about having to wait a month to "bed & breakfast" the stock for tax reasons is very easy to get round now - you can just move shares from physcial stock onto a spread bet. 

Adept Telecom (LON:ADT)

Share price: 245p (up 7.0% today)
No. shares: 22.5m
Market cap: £55.1m

Trading update - I'm not familiar with this company. Today's update covers the y/e 31 Mar 2016. It sounds as if the company is doing a little better than expected:

The usual Stockopedia graphics shows an apparently quite reasonable forward PER of 12.2, and the dividend yield of 3.1% seems reasonable:

I always check the "Price to Tang. Book" field too, because if it says "n/a", then it means that NTAV is negative - one tell-tale sign of a weak balance sheet. So this is a very quick check to tell you whether or not you need to prioritise taking a closer look at the balance sheet.

Balance sheet - it's weak, by my criteria. the following figures are taken from the most recent interim accounts:

NTAV is negative, at -£11.1m.

The current ratio also looks very weak, at 0.62.

Plus there is also £7.9m of long term borrowings.

It looks to me as if this group is too busy acquiring other companies, and stretching its own balance sheet in the process. Not sensible, as there's no support if something goes wrong.

My opinion - this reminds me of another telecoms company, called Alternative Networks (LON:AN.) - I looked into its accounts recently, and whilst superficially attractive & cash generative, it transpires that it's little more than a reseller of contracts for the big networks. So it's heavily reliant for group profits on the contract terms that it has with EE and Vodafone.

So I wonder if the same situation pertains with Adept? I've checked the "principal risks & uncertainties" section in the last results, and it does not mention supplier contract risk, so that's reassuring.

Overall, I'm wary of smaller telecoms companies. Things can go wrong quite easily, as technology is constantly changing. So how sustainable are the profits?

Also, I find the balance sheet at Adept too stretched to make it investable for me personally. Although my criteria are probably more stringent than for most investors.

Shareholder benefits scheme - this looks quite attractive, if you still use a landline:

The AdEPT shareholder benefits scheme has continued to attract new members during the year. The scheme, which is available to all shareholders owning a minimum of 250 shares, provides eligible shareholders with free residential line rental worth approximately £154 per annum for as long as they remain eligible shareholders.