Small Cap Value Report (Fri 1 Dec 2017) - PURP, GAW, RM2, PAM

1st Dec '17 by Graham Neary

41 comments 17251 reads

Morning,

Paul added some additional companies to yesterday's report, so it now covers:

Lamprell (LON:LAM)
James Latham (LON:LTHM)
ST Ives (LON:SIV)
On The Beach (LON:OTB)
HML Holdings (LON:HMLH)

It's at this link.

Cheers

Graham

Purplebricks (LON:PURP)

Share price: 356.6p (unch.)
No. of shares: 273 million
Market cap: £973 million

Purplebricks adds Feefo to customer review choices

This online estate agency has had a few issues with customer reviews.

Allagents suspended its reviews of Purplebricks in September, with the following notice:

Due to repeated threats of legal action forcing the removal of content and negative reviews from our website, we have regrettably taken the unprecedented step in suspending the PurpleBricks profile page until further notice (as of the 18th September 2017).

This was a huge red flag for me (see SCVR here).

Today, Purplebricks announces a new initiative which is supposed to ease concerns on the review front:

Purplebricks Group plc ('Purplebricks' or 'the Group') is pleased to announce a new partnership with customer review site Feefo, providing customers with even more opportunities to review the Purplebricks' service.

Feefo is widely regarded as being transparent, independent and secure, and is trusted by consumers as a vocal advocate of honesty in the reviews industry. It is only available to genuine customers, who are provided with a unique review link, ensuring only authentic reviews.

This all looks like suspiciously too much effort to me.

Fake reviews and bad reviews are a hazard to every company, not just Purplebricks. What makes Purplebricks different that it needs to pay a special company to verify its reviews?

As to the claim that Feefo "is widely regarded as being transparent, independent and secure, and is trusted by consumers as a vocal advocate of honesty in the reviews industry".

The funny thing about that that is, that Feefo itself has been reviewed by 39 people on trustpilot. See for yourself at this link. It is rated as "bad".

Examples:

There is a 5-star review from someone who reckons that the poor reviews…

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gsbmba99

1st Dec '17

Interesting analysis of Premier Asset Management (LON:PAM). Thanks, Graham.

I think the net fee margin is probably explained by their retail focus where 75bps (net) seems in line with other retail funds (or, at least, the ones I have). Almost all of their AuM are retail funds with a small amount of discretionary managed. As at 30 Sep, the sum total of AuM drawn from the monthly retail fund factsheets amounts to £5,750m as compared to corporate AuM of £6,087.8m. The difference was £162m in investment trusts and, I'm assuming, the remaining £170m in discretionary managed.

I think your mkt cap % AuM is useful but needs to be cross checked against fee margin. A bit like comparing EV/EBITDA multiples for two companies without looking at tax rates.

I quite like the fact that I can check the monthly fund fact sheets to see how they're doing in between the quarterly AuM announcements (a bit like CML stats for Mortgage Advice Bureau). They've had 23 funds each month since May (except June which was 24) having closed Strategic High Income Bond in July and opened Diversified Income in June. Since May, AuM increased in 13/23 funds in May, 19/24 in July, 17/23 in Aug, 16/23 in Sep and 22/23 in Oct. Thus, they don't appear overly reliant on any one fund (or fund manager) increasing AuM. The monthly AuM performance is despite the fact that many of the funds pay dividends very regularly (sometimes monthly).

The AIM listing document suggested (from memory) that "income" had been the leading fund inflow category in 7 of the 10 past years. Trustnet says that Woodford Income Focus, which opened in April, has AuM of £717m, about half of which came after launch. For the time being at least, "income" continues to attract assets.

The distribution platform does seem quite strong. It's almost exclusively through IFAs. They've attracted >£500m (gross) in each of the last four quarters. If they could cut down on the outflows they'd be growing even faster!

Gromley

Very interesting direct insight Phil (re Purplebricks (LON:PURP) or more specifically Feefo)

I'd be interested if you have any views on the trustpilot reviews of Feefo (strewth) that Graham pointed to. Do you think the claim; (not Graham's claim I should clarify) that Feefo will disappear reviews if the client asks them to; has any credibility?

Graham Ford

Regarding £RM2 you’ve got to almost feel sorry for Neil Woodford. He’s investing more in small early stage companies now and so a fair number will get into trouble but he seems to be having a very difficult run of luck at the moment. I’m sure many investors were swayed in the past by his holdings- if Woodford is in then it must be ok. Now the reverse is almost becoming true. He has had a big success with Purplebricks (LON:PURP) but now the price of that is going through a difficult period too.

Are we too overawed by the high performance of star managers and traders?

herbie47

Now Neil Woodford "warns of stock market ‘bubble’" "‘There are so many lights flashing red, I’m losing count’" : https://www.ft.com/content/64bfef5c-d5d0-11e7-8c9a-d9c0a5c8d5c9

vik2001

Neil woodford is a idiot. hes gambled with investors money on high risk start up companies. he has no one to blame but himself. he change his investing style and it no longer worked for him and he thought he was smart but obviously not.

his now warning of a stock market bubble, but if the tax bill is passed in the US the stocks will fly all the way again next year. If this is the case Japan is the place to be next year.

this is just my prediction I don't think the bubble if any will occur till the year of brexit.

Dan7710

Sadly not great news for Character (LON:CCT) this http://www.bbc.co.uk/news/business-42204182

Just as they look to put out a new update (next week alongside FYs) they get hit with a second batch of uncertainty. Rotten luck

ISAallowance

"but if the tax bill is passed in the US the stocks will fly all the way again next year."

Well, I guess it's possible. It's also possible they might not. Minervini on Twitter seems to think the markets are buying the rumour now and will sell the news if it passes, and sell the disappointment if it fails.

I guess we'll see one way or another soon enough...

PhilH

Re: Feefo

Well first of all, for better or for worse, anyone can rock up on the TrustPilot website and leave a review of Feefo.

Secondly it's entirely possible for someone to leave a negative review using Feefo.

Here's my most frank feedback to date ...

15-Nov-2016
Service: +
Phil is a wonderful person, and genuinely empathetic.
I'm afraid I didn't get what I needed from our sessions, and was in confusion about what the point of our time together was.
I felt almost like talking into dead space with no idea what should happen next.

Perhaps not the right form of therapy for me, but I appreciate his time none the less, even if we didn't get to do any 'work'.

I have no ability to edit, remove, hide that comment and actually I don't want to. To me it demonstrates that my reviews are genuine, that I'm transparent and open to feedback from my clients. At no point have I thought or even considered that I could approach Feefo to have a review removed.

Edward John Canham

2nd Dec '17

Unwise2

Games Workshop (LON:GAW)

Totally agree with your comments on broker forecasts. I'm not really one for graphs but am interested in number patterns and these seem to suggest earnings figures way in excess of the broker figures mentioned by Graham.

Sales pattern

If you look a the interim profit and loss figures for the last 3 years the second half revenues are always greater than the first half. The average for these three years in 46% in the first half and 54% in the second half. Logical? I would have thought that Xmas is a factor - if you have a relative that is mad keen on this product I guess the entire family breathes a sigh of relief and buys vouchers/gives money to buy.

This would suggest revenues of £128m in the second half and a total for the 2018 year of £237m.

Gross margin

The gross margin for the second half of 2017 was 74% - higher than previous @ 70% but there is some logic in higher turnover bringing manufacturing discounts/ efficiencies. This gives a gross margin of £175m.

SGA/ Royalty Income

SGA is rising but not by the same amount as revenue. Lets be cautious and assume it rises from its H2 2017 level of £44.5m to £48m in H1 and £50m in H2 - £98m for the year. Equally assume royalty income up from £4.5m a half to £5m - £10m for year.

This gives operating profits of £87m for the 2018 year.

Net profit after tax of 19% is £70m - given shares in issue of 32.1m an EPS of 218p arises along with a forward PER of 9.6 at todays closing price.

I would therefore suggest that the current brokers estimates are not up to date with current events.

Looking to the future, whilst I can see a possible breather in 2019, the base from which the company is operating is vastly improved for recurring sales. On the other hand, also equally possibly, this could mark the start of even greater expansion.

Even though this is my biggest holding I'm very tempted to add at this level.

(One final point with reference to my figures above as a check to my basic logic:-

If you take revenue of £109m per the trading statement at 74% a gross profit of £81m arises. Add £5m in royalties and take of £48m in SGA and you get £38m in operating profit which agrees with the statement.)

As always, my opinion, not advice and DYOR.

Phil

Hope everyone has a good weekend

iwright7

Phil,

Interesting analysis. Just how much out the house broker has been playing catch up can be seen in their recent target prices.

July - Peel Hunt raised its price target to 1500p, (from 1350p)
Sept - Peel Hunt today reaffirms its buy and raised its price target to 2000p.
Oct - Peel Hunt raised its price target to 2400p.

It doesn't give me confidence that they can accurately predict Games Workshop (LON:GAW) profitability in this financial year, let alone into the future. Ian

gus 1065

Hi vik2001.

Re. Neil Woodford, he’s one of the ultimate contrarian investors and made his reputation by shouting the odds about the emperor having no clothes when most saw his dot com wardrobe as the only game in town. Over a long career his performance has generally been very good. To date the performance of his new funds, Patient Capital Trust in particular, has been both absolutely and relatively poor as a number of large holdings in “new economy” companies have gone spectacularly wrong. (That said some of his “old” ones like Provident Financial have been pretty sick too.) To be fair to him, however, the WPCT fund is being managed in line with its original mandate and it was always sold as being a 5 year or more investment. Most cakes look messy half way through the making.

Smart and lucky are not the same thing and he’s clearly on a bad run at the moment. Like Antony Bolton who also made a radical late career shift (moving from UK Special Situations to China) he may have misplaced his investing mojo but I suspect this is temporary rather than permanent. Unlike Bolton, however, Woodford is now running his own fund company and doesn’t have the behemoth of Fidelity behind him. My concern for Woodford’s investors (I have a small WPCT holding in my SIPP) is that investors lose faith and look to draw out their capital in the near term and he becomes a forced seller of some of his large holdings in illiquid small caps which becomes a rout. This possibly has wider implications for investors in any of the companies where he becomes a distressed holder.

Gus.

N1ckcook

Gus, Woodford Patient Capital Trust plc is a closed-ended investment company. The outflow of funds forcing asset sales is a risk associated with open ended funds not closed ended funds. The choice of a closed ended fund is absolutely correct for long term VC/start up type investments.

Hi N1ck.

As you say WPCT is closed ended but the two income funds are open ended and also have relatively big holdings in companies such as Provident Financial (LON:PFG) and Purplebricks (LON:PURP) which might come under pressure if investment outflows make Woodford a forced seller. I agree the WPCT fund is shielded from this by being closed ended although recent poor performance might make it harder to raise fresh funds if he wants to pump more capital in to support his holdings.

Gus.

I've been invested with Woodford, in one fund or another, since 2005. My Woodford rant:

What perplexes me is that there are at least two instances where monumental falls in value should have been forseeable. I can't find the article anymore, but I'm certain that Woodford (or a representative) stated that their analyst had studied the Utilitywise (LON:UTW) accounting policies and that they understood and were comfortable with them. We've since learned that Utilitywise was declaring revenue from contracts that didn't commence for, in some cases, several years. Either they didn't review the accounting policies or they didn't understand them. Neither is a good answer.

The second one is Provident Financial (LON:PFG). I attended a presentation by Cattles some number of years ago. They also did doorstep lending. The Cattles management team touted their competitive advantage as being their agents who (usually) lived in very close proximity to their customers (eg on the same estate). A good agent was one who maximised the lending potential from every day events like weddings, graduations and car trouble amongst a large circle of acquaintances. A good agent also maximised collections because they often had line of sight to the comings and goings of the customer or knew the schedule well enough to maximise the likelihood of interacting with them (eg the local youth football match). Why didn't Woodford understand the business model well enough to see that firing 50% of the agents would significantly disrupt both origination and collections? Maybe he knew it thought the short-term pain was worth long-term gain. If he did see it, why not sell down at least some and re-buy when the price inevitably drops?

Orangetree

I think Neil Woodford needs to sack his team and start over because it's okay to make two or three investment mistakes, but to invest in RM2 is unforgivable, ordinary investors would have spotted five to six red flags in under an hour.

Or, he needs to start reading the Stockopedia discussion page for investment ideas! IMO

JohnEustace

By way of contrast, Keith Ashworth-Lloyd sold out of Provident Financial (LON:PFG) in his Buffetology fund ahead of the last profit warning at around 2040 - 2100p citing the reasons you mention.
He since bought back in at an average of 770p because he thought it oversold and believes they now have the right people in place to fix things.
Time will tell. I hold Buffetology but not any Woodford funds.

Toys r US closing stores. not ideal for £CCT

the thing with woodford hes been in a bad run in a bull market. there's no excuses for a fund manager like him to be performing like this. understandable if hes fund did that in a bad market but a bull market like we had this year, cmonnn woodie...

hayashi22

Don't think top managers want to work for Woodford as it's his show.

16th Dec '17

Games Workshop (LON:GAW) have hit 2500 without a peep from Peel Hunt. This is on massive volume today which must be institutional.

I guess we'll get the update in January - catching up once again!

Being a broker must be a really stressful job.

Phil

Small Cap Value Report (Fri 1 Dec 2017) - PURP, GAW, RM2, PAM

Purplebricks (LON:PURP)

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Graham Neary

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