Small Cap Value Report (6 Nov 2017) - IPO Comment, City Pubs, Shefa Yamin, SPO, BXP

Sunday, Nov 05 2017 by

Hello there! Graham here. Huge thanks to Paul for doing the entire SCVR effort by himself for the last couple of weeks.

This is our placeholder, published the night before, so that comments and suggestions can be made both now and first thing on Monday morning.

Best wishes


Comment on IPOs

I recently answered some interview questions on IPOs, where I tried to explain my perspective on them. Since then, I've been wondering whether my answers, and indeed my thinking on them, were sufficiently clear. This also follows up on Paul's recent comments/questions on the IPO landscape, after a couple of deals were cancelled at the last minute.

In a nutshell, I do follow IPOs. I think they're an important part of the financial landscape. They're a key indicator of the temperature of investor sentiment. They also tell us something about business and sector conditions, since most companies would prefer to float when they are doing well rather than when they are doing badly (or at least when prospects look good rather than when prospects look poor).

Do I invest in IPOs? Generally speaking, no. Most traditional value investors will warn you not to take part in a transaction (as a buyer) which has been heavily marketed and which takes place at the time of choosing of the vendor, as is the case with the typical IPO.

For the risk-averse investor, it makes sense to avoid IPOs, since by definition the company (and usually also the management team) lack a public track record with which to judge their past behaviour. But for every year that goes by without mishap following IPO, we can trust the management and the company that little bit more. I've also seen good statistical evidence to the effect that older stocks generally outperform newer ones.

For the more enterprising investor, however, it does make sense to focus some attention on IPOs. This is the more difficult task, but potentially a very lucrative one, of finding the diamond in the rough. For an example of someone who does this in a US context, I recommend Ian Cassell of MicroCapClub.

A fellow investor recently explained this to me with a brilliant analogy. From his horse-racing background, he explained that it was much easier to gain an edge against the bookies with respect to young horses with a…

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

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Sportech PLC is a United Kingdom-based pool betting operator and technology supplier. The principal activities of the Company are pools betting, both business-to-business (B2B) and business-to-consumer (B2C), and supply of wagering technology solutions. The Company's segments include Sportech Racing and Digital, Sportech Venues, Sportech Bump 50:50. Sportech Racing and Digital is engaged in the provision of pari-mutuel wagering services and systems principally to the horseracing industry. Sportech Venues is engaged in off-track betting venue management. Corporate costs segment include central costs relating to the Company in its capacity as the holding company. Sportech Bump 50:50 is a professional sports charitable lotteries business. Sportech Bump 50:50 enables sports teams to raise significant money for good causes by using its digital raffle technology platform in stadia on game day. more »

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Beximco Pharmaceuticals Limited (BPL) is engaged in the manufacturing and marketing of generic pharmaceuticals formulation products, including intravenous fluids and active pharmaceutical ingredients (APIs). The Company also provides contract manufacturing services. The Company produces approximately 300 generic medicines, which are available in over 500 different presentations and the portfolio encompasses various key therapeutic categories, including antibiotics, analgesics, anti-diabetic, respiratory, cardiovascular, central nervous system, dermatology and gastrointestinal. Its product categories also include anti-infectives, musculoskeletal, oncology, respiratory, skin care, vitamins and minerals supplement, and others. The Company's products include Acifix, Femzole, Q-Rash, Tamona, Taverin, Tobasol, IcyKool Cream, Intracef, Gastalfet, Iprasol, Calorate, Gentosep and others. BPL's products are sold in domestic and international markets. more »

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53 Comments on this Article show/hide all

Graham Neary 6th Nov '17 34 of 53

In reply to post #237123

Thanks for the suggestion, I'm not familiar with Arena Events (LON:ARE) but will keep an eye out for it going forward.

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simoan 6th Nov '17 35 of 53

In reply to post #237133

Cisco seems to be legacy networking.

Sorry, herbie but that's not correct. Anywhere that data goes, be it through wired or wireless connections, you will find Cisco kit, including cloud and data center applications. As such they are a direct competitor to companies like Arista. 

All the best, Si

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herbie47 6th Nov '17 36 of 53

In reply to post #237223

OK but Cisco's revenue has hardly grown in the 5 years, but ANET seem to be growing strongly.

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simoan 6th Nov '17 37 of 53

In reply to post #237238

OK but Cisco's revenue has hardly grown in the 5 years, but ANET seem to be growing strongly.

Yes, but within those numbers probably lies a growing data centre business as big as Arista. Cisco is on a P/E of 15, yields 3.5% and gives diversification across all networking technologies. As we know Elephants don't run. The only reason I can see to buy Arista is because it's been going up a lot, in the hope that it continues going up a lot. Not my bag at all :)

All the best, Si

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Wimbledonsprinter 6th Nov '17 38 of 53

Thanks for pointing out Beximco Pharmaceuticals (LON:BXP). Bangladesh still has around 6%, inflation and a currency that historically had depreciated (versus the USD). This needs to be taken into account at looking at historical growth and what multiple you would pay for that growth (on top of country risk). Does any reader have knowledge of the tax treatment on the dividend?

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herbie47 6th Nov '17 39 of 53

In reply to post #237253

Yes currency is a concern.

Div. tax seems to be 20%.

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JohnEustace 6th Nov '17 40 of 53

In reply to post #237243

Arista (ANET) has grown from nothing to $1bn in sales in eight years. Their third quarter report had sales up by 50+% and net income 100%+.
I'm a holder.

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Beginner 6th Nov '17 41 of 53

In reply to post #236903

I had a look at the pub estate here. They are missing a trick or two in their statements. Several of their pubs have accommodation and at least three include microbreweries on the premises. Having been asked to leave two of their establishments in the last couple of years I may well be banned from taking part in the IPO!!! (The estate is pretty impressive really, though as I recall the management I encountered were of the 'Tim Tim, Nice but dim' variety, and not really suited to this business).

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simoan 6th Nov '17 42 of 53

In reply to post #237273

Arista (ANET) has grown from nothing to $1bn in sales in eight years. Their third quarter report had sales up by 50+% and net income 100%+.
I'm a holder.

Yes, nice company but what happens when the data centre boom hits a bump in the road? FWLIW the Cisco Data Center business is not growing but has revenues 3x that of Arista. I am deeply sceptical about US technology valuations at the moment, even big companies like MSFT and INTC have relentlessly bullish charts. I see a bubble but have no idea when it will pop.

All the best, Si

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nicobos 6th Nov '17 43 of 53

In reply to post #237298

I whole heartedly agree Si but as George Soros once said "When I see a bubble forming, I rush in to buy."

The FANG stocks and US tech valuations have kept rising relentlessly and who is to say this won't continue for a year or two (or longer)?

The difficult bit is getting out before it pops ! That's where the real genius lies...

PS. I'm long on bitcoin (the definition of a bubble if ever I saw one!)

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purpleski 6th Nov '17 44 of 53

In reply to post #236933

I agree with Julianh about Purplebricks (LON:PURP). I too sold out in June before I heard Paul's bull/bear interview after making 150% at 408p so missing out on another 6k profit but ......

I have just bought house and definitely think this is a sector that is ripe for disruption from beginning to end. The whole conveyancing procedure is a nonesense (sorry any solicitors reading this) but whether Purplebricks (LON:PURP) are going to do it I am not sure. I think they are going to have a lot of competition, Easy brand and Rightmove to name two.

I to will sit on my profits and re-visit only if they fall significantly, which of course may indicate they have failed to disrupt!

KR Michael

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purpleski 6th Nov '17 45 of 53

On IPO's etc the Invest Like The Best podcast with David Gardner founder of Motley Fool at

is very relevant and readers here may find interesting. He has held Amazon since it was $3 through all ups and downs and still holds and Invidia from $5 to $40 to $28 flat for five years to the current price of about $208 Two give just two examples.

The podcast is fascinating IMO.

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purpleski 6th Nov '17 46 of 53

In reply to post #237143

Pretty certain that it is for us to check the web site daily and then post (if you want to) requests. I have reminder in my calendar. It works well!

Stocko as far as I can tell always sends the email out at the same time, whether Paul/Graham start the SCVR at 08:00 in the morning at 20:00 after a duvet day!!

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Aislabie 6th Nov '17 47 of 53

Intercede (LON:IGP) slipped out a horrible trading update in the middle of the trading day thus earning two black marks against it and the stock (which I hold) got appropriately slammed by 17%.
With a SR of 4 nobody could claim to be entirely blindsided but with the dust clearing a couple of points have made me pause before selling
The company has an eerie similarity to Synety/Cloudcall Cloudcall (LON:CALL); a growing , but jam tomorrow, stock with recurring revenue steadily rising; a belief that the market should fund it through these early times even if profitable operation moves further out. The excessive reliance on a few customers making for very uncomfortable potential surprises (as today).
BUT eventually jam does start to arrive because underneath it all is a product that people want and will pay for. Until then it is probably time to stay away while they work through the almost obligatory second and third profit warnings and heavily discounted fund raising!

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Ramridge 7th Nov '17 48 of 53

In reply to post #237348

Hi purpleski - excellent find. Thanks for bringing it to our attention. The bit I particular found interesting is how he emphasises that traditional valuation metrics are useless for FANG like companies and what he specifically looks for.

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purpleski 7th Nov '17 49 of 53

In reply to post #237558

Thanks Ramridge. kind of you to comment.

The podcasts in general are very good and I have listened to most of them, they are not too long and he interviews very interesting people and talks very little himself. And of course being the son of Jim O’Shaughnessy he has some reasonable DNA!!

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simoan 7th Nov '17 50 of 53

In reply to post #237308

I whole heartedly agree Si but as George Soros once said "When I see a bubble forming, I rush in to buy."

Well, I'm no George Soros but there are now sure signs of a bubble when Broadcom are making a hostile bid for Qualcomm (who in turn are in the midst of buying NXP) for $100bn. If the biggest technology deal in history is not a sign of the tail end of a bull market, I don't know what is. It was a pretty good indicator last time.

The difficult bit is getting out before it pops ! That's where the real genius lies...

No, the difficult bit is maintaining your investment discipline knowing that you will not be the first one out when the bell rings. In fact, knowing that you won't even hear the bell...

All the best, Si

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Howard Marx 7th Nov '17 51 of 53

In reply to post #237603

There's huge (tech) M&A deals virtually every year, so a bear market will inevitably be preceeded by one.

Hard to see any causality, though.

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simoan 7th Nov '17 52 of 53

In reply to post #237683

There's huge (tech) M&A deals virtually every year, so a bear market will inevitably be preceeded by one.

Yes, but this would be the biggest ever deal if it gets past US regulators, which is doubtful IMO. Reminds me an awful lot of the Time Warner/AOL merger at the start of the last tech bubble popping in 2000 :) Of course, it's different this time...

All the best, Si

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paraic84 8th Nov '17 53 of 53

In reply to post #237038

I was at their Temple Brew House last night and thought it was very good. It was v distinctive with lots of different beers to try and a fun interior and atmosphere. It was also busy for a Tuesday night although the venue was relatively modest in size. However, it is also next door to Davy's wine bar which they also own which was a larger venue and looked quieter. It seemed odd to me to have such direct competition - different drinks on offer but sometimes people just head to their nearest after work. I was impressed with Brew House though. Whether or not the whole group is a good investment is another matter of course.

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About Graham Neary

Graham Neary

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, also holding the Investment Management Certificate and the STA Diploma in Technical Analysis.Away from finance, my main interests are recreational poker and everything to do with China, especially Mandarin Chinese. more »


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