Small Cap Value Report (7 Jan 2015) - BOO, MJW, ESCH, TPT

Wednesday, Jan 07 2015 by

Good morning! Lots of interesting things going on today;

Boohoo.Com (LON:BOO)

Share price 23.1p (down 39% today)
No. shares: 1,123.1m
Market Cap: £259.4m

Profit warning - this online fashion retailer has issued a trading update for the four months to 31 Dec 2014. Looking at these highlights in isolation, they look fantastic;


So why have the shares dropped 39% this morning? It's because share prices are set by investor expectations, and in this case BooHoo had been growing very strongly indeed - but, an even stronger result was expected.

Therefore the shares are rebasing this morning for lower growth expectations. So are they good value now?

Valuation - I find it easiest to work on normalised EPS figures. Stockopedia shows that broker consensus for the current year (which is almost finished, as BooHoo has a 28 Feb 2015 year end) is for 1.19p EPS, rising to 1.63p EPS next year.

One broker says the profit shortfall is likely to be c.30% to 0.83p EPS this year. Another broker has revised down to 0.8p EPS this year. So that puts the shares on a PER of about 29 times the current year earnings. Still expensive, some might say. However, it's still a fast-growing company.

As this year only has about 8 weeks left to run, we should really be valuing the company on 2015/16 earnings. Forecasts this morning have been revised down by about 35%, so we're looking at ballpark 1.0p to 1.2p, so if we estimate that consensus might drop out at say 1.1p for the y/e 28 Feb 2016, then that puts it on a PER of 21 times.

Balance Sheet - the company mentioned £60m in cash today, which is just under a quarter of the market cap, although note that this will be at a seasonal high after buoyant Xmas sales.

My opinion - it is rare to find a highly profitable, cash generative online retailer. BooHoo stands out as being far more profitable (as a percentage of sales) than Asos, or indeed any other UK online retailer that I can think of. It makes an operating margin of nearly 10%, and that's during the fast growth phase, when such companies are usually consuming cash, not generating it.

This tells me they have a considerable competitive advantage - namely that these guys are experienced rag traders - BooHoo grew out of a Manchester-based clothing wholesaler called Pinstripe…

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Boohoo Group PLC, formerly plc, is an online fashion retail group. The Company is based in the United Kingdom and has a strong presence in the United Kingdom, the United States, Europe and Australia, selling products to almost every country in the world. The Company owns the boohoo, boohooMAN, PrettyLittleThing and Nasty Gal brands. These brands design, source, market and sell clothing, shoes, accessories and beauty products targeted at 16-30 year old consumers in the United Kingdom and internationally. more »

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Majestic Wine plc is a wine retailer. The Company acts as a holding company for its subsidiaries. The Company is engaged in the retailing of wines, beers and spirits. The Company operates through four segments: Retail, Commercial, Naked Wines and Lay & Wheeler. The Retail segment is a customer based wine retailer, selling wine, beer and spirits from stores across the United Kingdom, and online, and also incorporates the Company's French business. The Commercial segment is a business-to-business wine retailer selling to pubs, restaurants and events. The Lay & Wheeler segment is a specialist in the wine market and also provides cellarage services to customers. The Naked Wines segment is a customer funded international online wine retailer. Its subsidiaries include Majestic Wine Warehouses Limited, Lay & Wheeler Limited, Les Celliers de Calais S.A.S., Majestic Wine Employee Share Ownership Trust Limited, Naked Wines International, Inc. and Vinotheque Holdings Limited. more »

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Escher Group Holdings plc, through its subsidiaries, is a provider of distributed messaging, and data management solutions and services. The Company develops, markets, sells and supports enterprise-wide software applications for post office counter automation and distributed network communication. The Company's segments include Software development and consulting services, Software licenses, Maintenance and Support. The Company provides on-premise or cloud-provided digital communications and transaction management solutions for organizations working within various transaction management environments. The Company offers Riposte, which is a messaging software. The Company's solutions include digital point of service, including postal automation, banking automation and retail automation; e-government, including document management and digital growth hubs; consumer engagement, including eMoney and Identity, and logistics, including Track & Trace, and Click & Collect. more »

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  Is LON:BOO fundamentally strong or weak? Find out More »

18 Comments on this Article show/hide all

valuemonster 7th Jan '15 1 of 18

Hi pp, any thoughts on mjw please.

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valueman 7th Jan '15 2 of 18

I also like Boohoo Paul but worry about the rising dollar .This will increase costs about 8% from last . Do you think they will pass on higher costs or have to absorb them as this could affect all retailers profits negatively ?

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JoeKocsis 7th Jan '15 3 of 18

Thanks Paul, based on your article I have just invested into Booho

Regards Joe

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Edward Croft 7th Jan '15 4 of 18

I don't know about BOO - I've disliked it since the management floated it with a clear disregard for new investor outcomes.

I trust in the M-Score for growth stocks... it's been flagging for a long time several key risk factors for BOO...including concerns over receivables and accruals. Ally that with an inflated share price and one wonders why anybody has been invested - a profit warning always seemed round the corner. Now that brokers will be cutting numbers further, it may be a while for a floor to form.

It's always silly to call your company Boohoo on the Stock Market - it invites mocking on a day like today when investors are clearly hurting like crazy.

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brucepackard 7th Jan '15 5 of 18

Thanks Paul. Just to notice that boohoo comes up on James Montier short selling "cooking the books" screen. I know you normally dig deep into the numbers on retailers - but just thought it was worth mentioning.

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Splode 7th Jan '15 6 of 18

Ed - Aren't high receivables and accruals a feature of small, genuiinely high-growth companies? Altho Paul makes a reasonable case based on the numbers, I agree with you that the dust needs to settle a bit before deciding to invest in Boohoo.Com (LON:BOO).

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woodcutter 7th Jan '15 7 of 18

cheap? expensive? it seems this question appears regularly in the small cap reports. Whatever metrics you use to determine a companies value it should be taken in the context of it's historical numbers, sadly in the case of BOO we don't have that luxury. Nevertheless the sector is a crowded market place and always under margin pressure added to that i felt their website was pretty ordinary so despite the hype i avoided them and will continue to do so. Fundamentally there is no moat.

Just dwelling on the valuation point for a moment and assuming a basic PER metric for valuation puposes. I know Paul is a big fan of NXR so choosing that as an example it seems quite good value at present on a per of 9.3 based on forecast eps of 1.91 for this year yet historically the year end figures are: (figures from Digital Look)
2010 per 5.5
2011 per 8
2012 per 5.3
2013 per 8.7
2014 per 7.1

so despite appearing to be good value the current PER is historically high. Valuation is all relative to historical value and valuation of other companies within the sector. Just becuase something has a per of 25+ does not mean it is overvalued. Paul has alluded to this himself and he has neglected to invest in companies which he considers "overvalued", indeed they may not be and in some cases the sp has continued to rise.

Equally the suggestion that compnaies with higher PER's may fall further on a profit warning is also relative to historic valuations just because a business has a low PER doesn't mean it will be less impacted by a profit warning. (excepting blue sky and story stocks)

ZTF issued a profit warning this morning and despite this, after the drop, it will still be on a PER of around 20.

Valuation is what makes the market, buyers/sellers in the case of BOO it remains overvalued in my book, even after todays fall.


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Dendyver 7th Jan '15 8 of 18

In reply to post #89836

Hello Ed


I trust in the M-Score for growth stocks... it's been flagging for a long time several key risk factors for BOO...including concerns over receivables and accruals.

If you are referring to the Beneish's M-Score screen on Stockopedia which contains some 53 companies - I can't see BooHoo on it.

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Paul Scott 7th Jan '15 9 of 18

In reply to post #89836

Hi Ed,

That looks a complete red herring to me - i.e. concern over receivables or accruals at BooHoo.
As it's a retailer, it doesn't have conventional receivables - it sells in cash to the public. If you look at the most recent set of figures, interims to 31 Aug 2014 - they are completely clean. Receivables are negligible, as you would expect from a retailer, and I can't see any accruals at all, or other funnies in the accounts, and as you know, I usually sniff out accounting issues before other people!

The only issue with Boohoo.Com (LON:BOO) is that broker forecasts were too aggressive. Everything else is fine. In fact, the figures announced today are fantastic. Just not quite as fantastic as the broker was forecasting.

A lot of commentary on BooHoo today has been really muddled, and often completely wrong. That confirms to me that I've got a real bargain buying at 23p today!

This is a cracking growth company, now priced very reasonably in my opinion. Although it might take a few weeks for the irrationally negative market sentiment to clear, and new buyers wake up to the opportunity here (in my opinion).

Regards, Paul.

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Paul Scott 7th Jan '15 10 of 18

In reply to post #89838


That often happens with high growth companies.
There's nothing at all wrong with the figures at Boohoo.Com (LON:BOO) in my opinion, and I've checked them quite thoroughly. It's a rare beast - a high growth, high margin online retailer, throwing off organic growth from international expansion, with a growing cash pile, yet where market sentiment is (in the short term) negative due to a failure to meet very aggressive broker targets.
I see this as an opportunity, but only if growth continues at a reasonable pace. Obviously if there's another profit warning, and growth stalls, then it will have another de-rating.

Regards, Paul.

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herbie47 7th Jan '15 11 of 18

Not sure about Boohoo, I did buy some at 22p but after reading some more on here and sp sticking and then falling at 23p I have sold for a small profit. One to watch. Its hard to judge. Look at Quindell, were 25p now around 60p. Maybe tarnished companies are a buying opportunity?

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Paul Scott 7th Jan '15 12 of 18

In reply to post #89826

Hi valueman,

When I worked in the fashion sector, I would give the buyers a target gross profit margin to achieve, so they had to then work back to get cost prices down. If that wasn't possible, then selling prices had to rise to achieve the target gross margin.

I would imagine all retailers will work the same way, and hence they will all edge up selling prices simultaneously to absorb and cost increases caused by currency changes.

Regards, Paul.

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Maddox 8th Jan '15 13 of 18

Hi Paul,
BOO: You cannot argue with those figs - despite the failure in meeting unrealistic expectations. Looking more at the risks - what is your view on their exposure to changes in fashion? It's one consideration that has always led me to be cautious about investing in fashion retailers.
Regards, Maddox

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jakedog2 8th Jan '15 14 of 18


Excellent post above regarding valuation

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Ramridge 8th Jan '15 15 of 18

Hi Paul Re. Boohoo.Com (LON:BOO). I bought a reasonable holding yesterday at 22p with the view to making a quick turn; didn't fancy them for investment but a quick punt, yes.
I looked at the fundamentals again last night, on values now, and the company looks very attractive for a medium/ long term hold. A forward p/e of 18.5 is far from the stratospheric values we have seen in the past.The icing on the cake to me is the strength of the management. Like the proverbial Brighton candy rock, if you break them, they'd have 'retail' written inside.
Regards, Ram

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woodcutter 8th Jan '15 16 of 18

thanks jake

I read this column everyday and am grateful for pauls accounting insight, indeed it's helped to improve my FA accounting knowledge a little. However i sometimes feel having an accounting background could also have a downside as the business quality gets lost in the fog of techincal accounting and detail numbers. i'm not saying these aren't important but there are wider considerations which sometimes seem to be overlooked. Perhaps the business sometimes needs to be considered more as an investor and less as an accountant.

To add balance to that i'd also add it must be pretty damn difficult to do the kind of sector analysis required to give a detailed appraisal of any company in the time available before this column is posted.

BOO may well come good but it's a very high risk investment in a very competitive market place subject to the vagaries of the consumer and very dependedant on the quality of product design.


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valueman 8th Jan '15 17 of 18

Thx Paul -helpful.
For what its worth ,IMHO, Boohoo is far too expensive on a PE basis for exactly the reason we've just seen -over -optimistic expectations being dashed by what most businesses have -unreliable events . Better buying Shoe Zone on 10x with little optimism over future sales & be pleasantly surprised if they beat it. Market generally q.expensive .There aren't many co's that you say look great value these days (and I fully agree). Keeping pencil dry.

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herbie47 12th Jan '15 18 of 18

I see Boohoo shares were upto 27p today.

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 Are LON:BOO's fundamentals sound as an investment? Find out More »

About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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