Small Cap Value Report (9 Feb 2017) - BJU, ASHM, IDP, WATR, DFS

Thursday, Feb 09 2017 by

Good morning,

Quite a few updates today, so I'll try to prioritise those which are most significant (results vs. trading updates) and then see what's left.

Paul is away for a week but has rather dangerously brought his laptop with him!



Brainjuicer (LON:BJU)

Share price: 730p (unch.)
No. shares: 12.2m
Market cap: £89m

Unaudited results for the twelve months ended 31 December 2016

My third time covering this in as many months.

This share was sitting at 530p when I covered it in December - I've been watching it all the way up! But I think some of you have been participating in the rise, in which case congratulations are in order.

As was well-flagged by prior updates, PBT (profit before tax) comes in at £6.2 million, while net income almost reaches £4 million.

Remember that results are somewhat flattered by a GBP short exposure: gross profit is up by 27% at reported currency, or 15% in constant currency. It has heavy USD exposure, which also contributes to a higher tax charge than might otherwise be the case.

A helpful costs table is provided, so that we can see the non-underlying overheads (I tend to think of them as underlying, but at least the breakdown is fully transparent). Note the bonuses and share-based payments:



Guarded, as per usual:

We will continue to focus on our core products, particularly Ad Testing and Brand Tracking where we are beginning to get a foothold in large clients.  These products are comparatively easy to grow and scale, and they also provide more revenue visibility than our other products.  Nevertheless, our business still remains predominantly ad hoc, with limited revenue visibility, and as always we need to acknowledge that we cannot predict with very much certainty how revenue growth will unfold over the coming financial year.  Having said that, we are pleased with the continued progress across the business and remain confident in its long-term potential

Cash flow

Net cash generated from operations (pre-tax) was a very healthy £8.4 million, but the difference between that and the PBT figure is mostly accounted for by a working capital movement along with the use of share-based payments and FX gains (see footnote 7). So I personally would not read too much into the large cash flow figures given, from a company valuation point of view.

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

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System1 Group PLC, formerly BrainJuicer Group PLC, is a United Kingdom-based company, which is focused on marketing and brand consultancy, with proprietary market research and advertising solutions grounded in the principles of behavioural science. The Company’s services include System1 Agency and System1 Research. System1 Agency is advertising agency, that creates advertising proven to translate emotion into profitable brand growth. System1 Research produces the FeelMore50, an annual ranking of the world’s 50 TV and digital ads. The Company offers its client create 5-Star, fame-building communications. The Company operates in the United Kingdom, the United States, Continental Europe, Brazil, China and Singapore. more »

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Ashmore Group plc is a United Kingdom-based company, which operates as a specialist emerging markets asset manager. The Company offers a range of investment themes, such as external debt, local currency, corporate debt, blended debt, equities, alternatives, multi-strategy and overlay/liquidity. Its geographical segments include United Kingdom, United States and Others. The external debt theme invests in debt instruments issued by sovereigns (governments) and quasi-sovereigns (government-sponsored). The local currency theme invests in local currency-denominated instruments issued by sovereign, quasi-sovereign and corporate issuers. The corporate debt theme invests in debt instruments issued by public and private sector companies. The Company's products are available in a range of fund structures, covering the liquidity spectrum from daily-dealing pooled funds through to multi-year locked-up partnerships. more »

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InnovaDerma PLC is a holding company. The Company develops a range of male and female at-home and clinically proven treatments for hair loss, hair care, self-tanning and skin rejuvenation. It operates through hair and beauty division. Its products include Leimov Personal Hair Laser Starter Kit, Leimov Hair Treatment Pack, Leimov Bio Cleansing Shampoo, Leimov Thickening Conditioner, Leimov Scalp Therapy Day Treatment, Leimov Scalp Serum Night Treatment, Leimov Deep Cleansing Scalp and Body, Leimov Hair Treatment Pack for Her, Leimov Personal Hair Laser Starter Kit for Her, Leimov Vitality Shampoo, Leimov Follicle Boost Therapy, Leimov BioPlex Scalp Serum, Leimov Scalp and Body Exfoliating Spa, Leimo Instant Hair Introductory Pack, Leimo Instant Hair Regular Pack, Leimo Instant Hair Building Fiber, Skinny Tan-Ab Shader, Skinny Tan-Dermabrasion Pre-tan Primer, and Tan and Glow. It operates in the United Kingdom, the United States, Australia, New Zealand, the Philippines and South Africa. more »

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  Is LON:SYS1 fundamentally strong or weak? Find out More »

17 Comments on this Article show/hide all

GJR 9th Feb '17 1 of 17

Hi Graham, any chance you could have a look at Innovaderma (LON:IDP) if you get the time / inclination. Todays half year report has a couple of interesting comments. Jan sales at record levels - usually a quiet month , new distrib agreements in the US also not included in figures, 60% margin. Valuation looks a bit warm but looks likely to grow into it?

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Ramridge 9th Feb '17 2 of 17

Re. Brainjuicer (LON:BJU)   

I am always wary in investing in a company whose revenue visibility is poor, as readily acknowledged by the CEO in today's RNS:

Nevertheless, our business still remains predominantly ad hoc, with limited revenue visibility, and as always we need to acknowledge that we cannot predict with very much certainty how revenue growth will unfold over the coming financial year.

They have also missed broker forecast of eps of 32p. Actual eps was 30.3p. So that pushes PE to 24 with forecast eps growth of 16%. A bit too rich for me given my first comment.

No position held.

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Graham Neary 9th Feb '17 3 of 17

In reply to post #170878

Hi GJR, I've done the best I can, my first time looking at it. Many thanks for the suggestion!


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GJR 9th Feb '17 4 of 17

Thanks Graham , much appreciated.

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FREng 9th Feb '17 5 of 17

Ashmore (LON:ASHM) looks like an interesting way to gain exposure to emerging markets.

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paraic84 9th Feb '17 6 of 17

In reply to post #170938

I haven't looked at Ashmore (LON:ASHM) before but I would also encourage readers to look at City of London Investment (LON:CLIG). It focuses on emerging markets, most of its income is in dollars, it has a wonderfully transparent management which is a role model for all other companies, and it has a shed-load of cash which means it can pretty much guarantee its 24p dividend for some time to come. I am not a holder at present because i am convinced that there will be a dip in share price on the next Trump protectionism announcement, but it is worth a look.

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Graham Neary 9th Feb '17 7 of 17

In reply to post #170950

Thanks for the suggestion Paraic

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Whitbourne 9th Feb '17 8 of 17

In reply to post #170950

Researching City of London Investment (LON:CLIG) as paraic84 suggested, I saw their RNS of 24 January which links to this research report:

This looks very like a broker note, which Paul and many others have argued ought to be published and not restricted to the institutions. My first reaction was - good for the company, this is an example for others to follow. My second reaction was to ask how come this note can be made public via RNS? According to the note itself,

"Hardman Research Ltd, trading as Hardman & Co, is an appointed representative of Capital Markets Strategy Ltd and is authorised and regulated by the Financial Conduct Authority (FCA) under registration number 600843 [...] However, the information in this research report is not FCA regulated because it does not constitute investment advice (as defined in the Financial Services and Markets Act 2000) and is provided for general information only."

However the covering text in the RNS announcement says:

"Our research is provided for the use of the professional investment community, market counterparties and sophisticated and high net worth investors as defined in the rules of the regulatory bodies. It is not intended to be made available to unsophisticated retail investors."

I am confused, first because the two statements appear contradictory and second because surely by publishing the note, the company is doing exactly what the text says is not intended, namely that the note should not "be made available to unsophisticated retail investors."

Can someone with a better knowledge than mine of the regulations explain what the rules are on this?

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fdthomas 9th Feb '17 This post is under review

Like Paul I'm on holiday until May , I'm in sunny Cape Town until mid may getting away from the UK winter, not doing any business/ investments until July,?

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rhomboid1 9th Feb '17 10 of 17

In reply to post #170968

I'm not sure how that knowledge helps my investments but thank you for posting.....have you tried Trip Advisor? it seems more relevant somehow.

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TMFMayn 10th Feb '17 11 of 17


"In terms of reasons why Ashmore might be worth further research, consider their view on emerging markets:"

ASHM's view on Emerging Markets has been consistently upbeat (it wants to keep clients invested in its asset class after all). But such optimism has hardly tempted clients to come on board.

Here are a few choice quotes from the 2011-2016 annual reports:

Emerging markets equities valuations suggest the upcoming quarter may represent a good entry point with earnings forecast to grow strongly over the medium term.

The opportunity for raising AuM from both developed country and emerging markets sources as they increasingly come to realise the attractiveness of the emerging markets asset classes over developed market alternatives, remains a compelling one.

In summary, more and more investors are seeing Emerging Markets debt as an alternative to fixed income in general, not just developed world corporate credit. Indeed, with yields in the developed world either high for a good reason or yielding next to nothing, Emerging Markets debt looks highly attractive. ??

Furthermore, after a period of relatively poor performance and flows, Emerging Markets equity, which has long been an established asset class, looks to be ripe for a good year given relatively low valuations.

Dedicated long-term investors recognise these characteristics of the Emerging Markets asset class, and can take advantage of the asset re-pricing that results from technical factors rather than a change in fundamentals.

??Demand for Emerging Markets themes with relatively low correlation to the US treasury market will continue: equities, local currency assets, blended debt and shorter duration, higher yielding corporate debt offer attractive prospective returns.

Emerging nations are generally in good health and in aggregate are expected to grow faster than the developed world, thereby continuing to increase their importance to the global economy and exposing underweight allocations.

Rising geo-political risks in certain parts of the Emerging Markets world, as well as elections taking place in key economies, have led to uncertainty and hence price volatility in the short term.??This environment provides opportunities to deliver longer-term performance for managers such as Ashmore that employ a disciplined, fundamental approach to assessing economic, political and market risks, and that continue to invest over the cycle.

Across global markets there is likely to be convergence between asset prices and fundamentals over the next few years. In Developed Markets, this is likely to take the form of inflation and currency devaluations rather than real rate increases, austerity and reforms.

In contrast, after a period of continued volatility, Emerging Markets’ asset prices appear to be discounting a much worse fundamental outlook than is likely to arise, even with higher US interest rates. This suggests that the rational asset allocator will increasingly shift towards Emerging Markets, where there is greater value, more supportive fundamentals, and a need for investors to address underweight positions.

The volatility and weakness experienced recently in Emerging Markets assets, when se against improving economic fundamentals, has provided good investment opportunities for Ashmore’s value-based processes.

Ultimately, though, the value available in Emerging Markets contrasts starkly with current pricing levels for many developed world markets, and this will encourage investors to address their weightings in Emerging Markets, resulting in stronger client flows over time.

And yet over the last 5 years client AUM has dropped from $66b to $53bn, as about $10bn of client money has been withdrawn. 

The pretty poor investment performance -- a negative $3bn has been lost by ASHM through its investment decisions during the same 5 years -- has no doubt prompted the exodus. 

No wonder the average basis fee points ASHM earns on its client AUM have declined during each of the last 5 years. 

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Graham Neary 10th Feb '17 12 of 17

In reply to post #171127

Re: optimism, if you look at something like the MSCI All Country Asia ex Japan Index, you'll see it has achieved almost nothing in terms of capital gains since the 2009 rally. Emerging markets globally are on a PE of 12, while the US is over 17.

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Arturo82 10th Feb '17 13 of 17

In reply to post #170968

That's very useful investment advice, many thanks. Enjoy Cape Town - I hope that you have a secure compound with CCTV and armed guards.

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TMFMayn 14th Feb '17 14 of 17

In reply to post #171142

From ASHM's latest City presentation, it does seem Emerging Market equities have generally traded at a discount to Developed Markets equities:


The discount may have been narrower in the past, but the chart does not make it obvious the current discount is compelling when compared to certain times previously. 

Anyway, most of ASHM's AUM is in debt, bonds etc., and the associated relative-valuation charts in the presentation (appendix 2c) do not appear to show obvious valuation anomalies in those AUM categories either at present:

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unwise2 14th Feb '17 15 of 17

In reply to post #171142

Graham where have you got your information for the PE of the US?

Stockopedia shows the S&P500 on a PE of 21.8 median, 27.8 mean (TTM)

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Graham Neary 14th Feb '17 16 of 17

In reply to post #171313

Thanks for the comment Maynard.

unwise, my source is here, using forward P/Es on Thomson Reuters:

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unwise2 15th Feb '17 17 of 17

In reply to post #171337

AIUI Stockopedia sources all its data from Thomson Reuters as well, I find it difficult (impossible?) to believe earnings will grown sufficiently to bring down the P/E from the numbers quoted on Stockopedia to 17.

The reason I am labouring the point is you could form 2 very different opinions about the U.S market and global markets in general if the P.E is 17 or 28.

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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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