Small Cap Value Report (Fri 12 July 2019) - TCG, BOOM, MGR, FLO, GYM, SIXH, MERC

Friday, Jul 12 2019 by

Good morning!

I will scroll back and look at events from earlier in the week, once I've covered today's news.

Now let's catch up on two stories from ealier in the week:

Thomas Cook (LON:TCG)

  • Share price: 8.5p (-36%)
  • No. of shares: 1536 million
  • Market cap: £130 million

The fat lady is singing for shareholders at Thomas Cook (LON:TCG), where the proposed recapitalisation envisages that "significant amount of the Group's external bank and bond debt will be converted into equity". Commiseration to anyone who is holding this.

We've not written much about Thomas Cook in this report. For me, there were two obvious reasons: 1) until recently, it hasn't qualified as a small-cap, and 2) the writing has been on the wall that the equity was headed for disaster, so there would be little to say.

IG says that these shares are unborrowable, but I know one or two bears who managed to open short positions - well done to them!

Prospects remain extremely bleak, even at 8.5p. If the company avoids administration and has an orderly recapitalisation, the best-case scenario that I can imagine for existing holders is that the fundraise happens at 1p (putting a value of £15 million on the existing equity).

The only reason for creditors and new equity investors to offer crumbs to the existing equity is to get the recapitalisation voted through. But if shareholders reject the recapitalisation, then administration beckons and with it, the likelihood that they get nothing at all.

Needless to say, I reckon these shares are uninvestable - further downside to come of at least 90%.

Audioboom (LON:BOOM)

  • Share price: 255p (unch.)
  • No. of shares: 14 million
  • Market cap: £36 million

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

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Thomas Cook Group plc is a holiday company. The Company's segments are United Kingdom, Continental Europe, Northern Europe and Airlines Germany. Its hotels and resort brands include Sentido, Sunprime, Sunwing, Sunconnect, Smartline and Casa Cook. It has airline operations in Belgium, Scandinavia and the United Kingdom. It has a fleet of over 90 aircraft under the Thomas Cook Airlines and Condor brands. It operates from approximately 20 source markets in Europe and China. Its Sentido brand has operations in Germany, Austria, Switzerland, Belgium, Hungary, Poland, Netherlands and Czech Republic. Its Smartline brand has operations in Germany, Austria, Switzerland, Belgium, Hungary, Poland, Netherlands and Czech Republic. Its Thomas Cook brand has operations in Germany, Austria, Switzerland, Belgium, Hungary, Poland and Netherlands. Its Sunprime Hotels brand has operations in Germany, Austria and Switzerland. Its Neckermann brand has operations in Germany and Austria, among others. more »

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Audioboom Group plc operates an audio platform for hosting, distributing and monetizing content. The Company works with approximately 2,400 active broadcasters, content creators and podcasters around the world, and hosts in over 7,400 content channels. The Company's hosting and distribution platform allows partners to embed, share through social channels and re-syndicate their content. The Company receives over 40 million listens per month. It also works with its partners to monetize their audio through live in-reads, the dynamic insertion of pre and post roll audio adverts and video advertisements. Its audio, cloud-based, software as a service (SaaS) platform enables the creation, broadcast and syndication of digital audio content across various devices, networks and geographies. Its subsidiaries include Audioboom Limited, Audioboom Inc, One Delta Limited and Audioboom Pty Limited. more »

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Miton Group plc, formerly MAM Funds plc, is an investment management company. The Company provides fund management services. Its funds are invested in a range of asset classes under various investment mandates, including multi-asset, equity and portfolios of collective investment schemes. Its product range includes equities, such as CF Miton UK Multi Cap Income Fund and FP Miton Income Fund; multi-assets, such as CF Miton Cautious Multi Asset Fund and PFS Miton Cautious Monthly Income Fund; fund of investment trusts, such as CF Miton Worldwide Opportunities Fund, and closed-end funds, such as The Diverse Income Trust plc and Miton Global Opportunities plc. Its subsidiaries include Miton Group Service Company Limited, which is a holding company and central services provider; PSigma Asset Management Holdings Limited, which is an intermediate holding company; Miton (Hong Kong) Limited, which is a marketing company, and Miton ESOP Trustee Limited, which is a trustee company. more »

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30 Comments on this Article show/hide all

BigB 12th Jul 11 of 30

In reply to post #492291

Having worked in the industry at a fairly senior level for over 25 years, sadly I concur with your observations re  long term outlook for dealers. Also, within the next 5-10 years people will start to forgo the hassle and cost of owning cars for in city travel/commutes and use autonomous electric vehicles via mobile apps. The manufacturers are all busy working on these solutions. E.g.,  VW have today announced they are committing $2.6B to Ford autonomous programme.  For dealers, I can only draw parallels with the horse industry in the first half of the 20th century.  They will still exist but in relatively tiny numbers. 

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Housemartin2 12th Jul 12 of 30

In reply to post #492246

The management of Flowtech Fluidpower (LON:FLO) do seem to know what they are doing but I do feel that these sort of businesses ( small companies supporting manufacturing ) are likely to be hit badly in the forthcoming recession. Reluctantly I sold out last week.

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stuartb58 12th Jul 13 of 30

Trade payable at Lookers may well linked to consignment stock of new vehicles, so not as potentially damaging as might first appear. Strong cash generation and solid asset backing has encouraged me to dip a toe in this morning.

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dmjram 12th Jul 14 of 30

Would be a bit wary of asset managers with open fund structures especially with a small/micro cap slant at the moment with the BoE is making noises about regulatory changes following the Woodford gating debacle.Miton seems likely to be impacted by any changes.

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Snoo 12th Jul 15 of 30

In reply to post #492311

There is quite a handy presentation on the GYM (LON:GYM) site about IFRS16 and how this affects the accounts, basically dilutive in earlier years and accretive in later years.

Average lease time left of a gym is 16.5 years, with some £300m+ of lease liabilities. Looking at the number of gyms I suspect the deals they negotiate are fairly good ones.

Buried at the bottom of the report is a note about how they have changed their depreciation on equipment - they have now extended their useful life as there is evidence that more stuff is surviving longer.

I too regret not buying in at under 200p. Management appear focused and their execution is good. I did believe there could be a threat from Sports Direct, but at the bottom end of the market I do believe it would be really difficult for another low-cost provider to undercut them. So, there may be scope to increase rates a little further although I think there is a natural limit on how far it can go. Very few people would pay £30+/month for instance unless there was a very good convenience factor.

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HornBlower 12th Jul 16 of 30

In reply to post #492346

average lease term 16.5 years! is this the Debenhams model?

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Paul Scott 12th Jul 17 of 30

In reply to post #492336

A lot of car dealers own considerable freehold property portfolios. So the downside risk may not be as bad as people think, at least for now. I remain of the view that most people will still want to own their own car - it's a status symbol, and an object of pride for many people, and something you can personalise, it's a home from home. Using an autonomous vehicle instead would just be like catching the bus, instead of using your own car - i.e. not something you want to do, but is occasionally necessary!

At 36p, Lookers has a mkt cap of £140m.

Its last reported NTAV was higher, at £168.5m, which includes £250m freehold property.

The main drawback with Lookers for me, is the recently announced investigation into its selling techniques, which could involve fines.

On balance I'm also steering clear of this sector at the moment, although at some point there could be asset-backed value there, perhaps, if mkt caps drop a long way below the value of freehold property.

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Paul Scott 12th Jul 18 of 30

In reply to post #492386

GYM leases - it would be worth checking if they have break clauses in those leases, as that's the ideal scenario - longish leases, so you can hold on to the profitable sites, but with 5-yearly break clauses, so you can ditch any problem sites.

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jonesj 12th Jul 19 of 30

Audioboom (LON:BOOM). I suspect there are high risks with transitioning from podcast applications to studios.
When I listen to podcasts, it's the content that matters, not a fancy studio or the app. I loaded Player FM, for "Invest With The Best" content & when that was exhausted, loaded Podbean for some other content.   The app, the tech and the studios were secondary considerations.  Even though I detest Podbean as an app, I have it for the content.

I would imagine most other users decide to listen for the content, not a fancy production studio ?

Incidentally, most of my recent "podcast" listening has been YouTube videos (e.g. Mohnish Pabrai) converted to audio via onlinevideoconverter (commendably slick) and then played back with Player FM. A lot of these were recorded where he was presenting in person or presenting remotely from his office PC. No fancy studio.

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rmillaree 12th Jul 20 of 30


This is from the admission document - this suggests it's wasn't standard to have break clauses with regard to the sites they had at that time of admission (2015)

Property leases and development The Gym seeks to enter into leases with a minimum term of 15 years. The Gym’s lease agreements typically include the following terms: no breaks, rental uplifts every five years, either by fixed increases or increases in line with the CPI or RPI, and security of tenure at the expiration of the lease (whereby the Group has the right to apply for a new tenancy at the end of the term, and the landlord may only oppose the grant of a new tenancy on certain prescribed grounds). This provides the Group with visibility over its future property costs and provides protection to the Group from increases in rent due to volatility in the
commercial property market, particularly in Greater London where the Group has a significant presence and where rents can otherwise be subject to significant year-on-year increases.

I am very sanguine about the long lease situation , you can look at it as potential millstone around their neck and it may be. However i would say gyms are not exactly like shops - move  a shop and most of the customer base will go to the new shop unless its a very generic. shop type However if a gym moves and a new gym replaces that gym in the old location i would guess a high % of bods would be tempted to go with the old site if its roughly the same ?? i may be wrong in that regard - not ever having frequented a gym i am the exact opposite of an expert. Perhaps my experience comes from pubs  where as long as the price is right and the drink acceptable the name on the door matters not.

Presumably with such long leases there can be mitigating steps put in place to come to compromise agreements with landlords  - if on wants out and the premises can be re-let?

Fundamentally if i though that if they cant have  shelf life of 15 years with the gyms they open i wouldn't want to be investing anyway - i do admit though i would guess gym popularity may come and go over time and disruptors may turn up with better offering (virtual gym anyone?) so i would agree there is some risk element here that they could end up like Debenhams i guess.

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Asagi 12th Jul 21 of 30

So the share count could increase to 160 million, for a market cap of £32 million ($40 million) at 20p.

600 says that its adjusted net income from continuing operations this year was $4 million, leaving us with an adjusted P/E multiple of 10x.

but if the warrants are exercised, 600 (LON:SIXH) will use the monies to repay the debt, saving 8% of $9.5m per annum i.e. $0.76m. In that case, net income would be higher, at $4.76m and the P/E multiple would be 8.4.

Asagi (long 600 (LON:SIXH) )

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WDWombat 12th Jul 22 of 30

'Investment performance was strongly positive (although this is less interesting, since it's largely beyond Miton's control).'
Er surely not. The whole point of active managers is to do well compared to the comparative group and the market. perormance is one big reason that new money comes in. Look at Woodward. I reckon that Miton overaall were up on their funds by about 12% in the first six months. That is pretty good. Their really big funds - UK Multicap Income (£!.2bn), US Opps (£634mn) & European (£610) have done pretty well though the first two have slipped to lower second quartile over 3 years and 1 year. European is absolute top of class over 3 years and 1 year and that is a big class of over 100 competing funds. Unusual and very impressive. Their UK Smaller (£129mn) appears to have n awful record however.
I have only been reading the recent AUM headlines on active fund managers but it seems to me that among the 'boutiques' Liontrust are doing really well. Though one has to concede that on the profits front Polar Capital has been outstanding.

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FREng 12th Jul 23 of 30

In reply to post #492321

within the next 5-10 years people will start to forgo the hassle and cost of owning cars for in city travel/commutes and use autonomous electric vehicles via mobile apps. The manufacturers are all busy working on these solutions. E.g.,  VW have today announced they are committing $2.6B to Ford autonomous programme.  For dealers, I can only draw parallels with the horse industry in the first half of the 20th century.  They will still exist but in relatively tiny numbers.


You are much more optimistic about the technology breakthroughs that will be needed than I am (and I work in the safety-critical software industry).

But even if the autonomous vehicle (AV) technology works perfectly, what the car passenger will have with your scenario is a driverless version of Uber - which they already have available today. And it won't have a driver to clean the car from the mess left by the previous passengers, respond to unusual situations, or break the law if necessary to get round an obstacle or avoid an attempted robbery.

So if you are right, Uber will make more profit by not having to pay their drivers but passengers will get a worse service than they can have today and there will be fewer incentives than already exist to give up their personal car.

The motor manufacturers are investing heavlily because if autonomous cars are successful they face an existential threat from the tech companies, as cars become more and more "computers on wheels".

Maybe it will be the cybersecurity companies that will profit from AVs, once the risk from successful cyberattacks becomes a real problem.  "In a gold rush, invest in shovels".

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sheeza 12th Jul 24 of 30

GYM (LON:GYM). I've been going to the same gym for 17 years, in which all the equipment has been changed twice, so perhaps depreciation over 7.5 years is an industry standard.. Over that time I guess numbers have declined a little, probably due to increased competition.

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stuartb58 12th Jul 25 of 30

In reply to post #492406

Thanks for this Paul. I have had two cars in the last 19 years, both from Lookers and have always found them very good to deal with, albeit servicing is expensive (but the coffee if waiting is great!). First of these was a Lexus, which lasted 17 years and service was so good that I bought some shares and went to Lookers AGM in Manchester to sing the praises of the dealership. Met the now CEO Andy Bruce there and impressed. When the Lexus went a couple of years - and 230,000 miles- ago, Lookers gave me an excellent deal on new Jaguar XE, which has been faultless to date. Bruce certainly has issues coming at him from everywhere (and the biggest uncertainty is indeed over the FCA investigation) but my gut feel is that with patience it will come good. Not perhaps the best reason for trying to catch a falling knife!

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JohnEustace 12th Jul 26 of 30

In reply to post #492476

I'm surprised that someone driving a Lexus would have that much contact with the dealership!

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stuartb58 13th Jul 27 of 30

Hi John. IS200 SE. It was mainly17 annual services, but it did blot its copybook with a brake caliper seizure at around 200,000 miles!

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hayashi22 13th Jul 28 of 30

In reply to post #492476

Amazed the Lexus went..these cars are almost indestrcuctable/reliable. Had to be talked into getting on the second. One point I have never figured with driverless cars...I happen to quite like driving. Don't think I am alone..will you be able to continue?!
No chance of getting 230,000m out of the Jag.

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Graham Ford 13th Jul 29 of 30

In reply to post #492461

Once it becomes apparent that the tech does not fall asleep at the wheel, does not drive the vehicle drunk or high, does not have a blind spot, does not tailgate, does not lose concentration, won’t do a hit and run, etc etc the public will start to think that vehicles that cannot do this are a menace. Of course AVs will fail from time to time but as clear water becomes evident with the safety record of other vehicles public opinion will shift in their favour. The desire for near to 100% safety record in order for AVs to be accepted will abate.

Furthermore, business people will start demanding driverless capability so they can spend time in the vehicle making phone calls etc. Cyclists may start demanding that vehicles that cannot monitor their blind spots with sensors be banned to reduce the number of serious accidents involving motor vehicles and cyclists.

I cannot think why a driverless taxi would be dirtier than one with a human driver when the companies operating them will clearly be able to afford to spend some of the money saved on not having drivers on cleaning them regularly through the day and surely they will have some sensors to detect when they need cleaning.

Insurance costs have become prohibitive for young people so why bother spending all that money on driving lessons and insurance if you don’t have to? The attraction of being able to go out drinking and no one having to limit their intake because they are driving is also likely to appeal to a certain segment of the population. Insurers already offer discounts to people who are happy to have their driving monitored by a black box. So, there will be plenty of financial incentives to gradually adopt vehicles with more and more safety features to the point where the vehicle itself is taking care of the vast majority of the driving tasks anyway. Advanced Emergency Braking Systems are already starting to be fitted as standard, so humans will not be allowed to have full control of braking in some circumstances.

It’s very hard to predict the speed of change but it could come much faster than people think. My own prediction would be within ten years as the environmental need to change away from fossil fuel powered vehicles will be speeding up the rate at which vehicles get replaced anyway.

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stuartb58 14th Jul 30 of 30

Hayashi - only two years in, but the petrol XE has been a revelation. Said goodbye to the IS200 with some misgivings (still in good nick overall and an agile car to drive) but fancied a change at age 70 and the Jag's comfort and handling are superb. Now only doing about 10K miles per annum and averaging nearly 10 m.p.g. better than the IS. No squeaks and rattles to date and the stop /start has worked out that I do not want it! Visibility can be tricky at angled junctions and boot not great, but helped by (optional) split/fold seats. No regrets so far!

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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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