Small Cap Value Report (Fri 13 Apr 2018) - Part 2 - GMD, TRAK, MTC, SOLI

Friday, Apr 13 2018 by
56

Good morning, it's Paul here!

Graham is writing today's main report (Part 1).

This report (Part 2) is a bonus report from me, to catch up on some of the company reports which I missed earlier this week, due to generally getting bogged down, not sleeping very well, and feeling permanently tired (which makes writing difficult).



GAME Digital (LON:GMD)

Share price: 39.0p
No. shares: 172.9m
Market cap: 67.4m

(at the time of writing, I hold a long position in this share)

Changes in major shareholdings

All was revealed yesterday afternoon, with a series of "Holding in company" RNSs. I was correct that Elliott Advisors (Duodi) has sold completely, its 36.5% stake in GMD. However, my theory that Sports Direct might have bought the overhang, and launch a bid, was wrong (wishful thinking perhaps!). Our reader "Gromley" was correct - that the overhang has been placed with various institutions.

There are now some excellent new names on the GMD major shareholder list, in particular I very much like that Gervais Williams' outfit, Miton, has taken a hefty 13.1% of the company at 35p. Canaccord has taken 11.8% for discretionary clients (possibly something to do with Hargreave Hale, I wonder?), and J O Hambro has taken 5.1%. The balance I suppose would probably have been distributed to under 3% holders, hence not requiring disclosure.

All in all, whilst falling short of my hopes for a takeover bid, this is a very pleasing outcome. A huge overhang of GMD shares, which was clearly depressing the share price, has been eliminated in one fell swoop. We also have some respected institutions coming on board at 35p.

I reckon this endorses the bull case - the new strategy of developing "BELONG" format stores, both standalone, and within Sports Direct shops. That the deal was done at 35p, with the share price rising as the deal would have been underway, seems encouraging to me, looking at the recent chart (see below).

I imagine there would probably have been presentations to institutions, who clearly like what they heard. It's always good when placings (for new money, or secondary placings of existing holdings) are done into a rising share price, at no discount.

This deal should improve liquidity in GMD shares, and could trigger follow-on buying from institutions perhaps, if they like the company's future…

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GAME Digital plc is a retailer of video games. The Company operates approximately 580 stores across the United Kingdom and Spain. The Company's segments include UK, Spain, and Events, Esports & Digital. Its UK and Spain segments are engaged in the sale of hardware, software, accessories and digital. Its Events, Esports & Digital businesses include SocialNAT and Ads Reality Limited (Ads Reality). The Company's activities include multichannel retailing and merchandising; supply chain management and distribution; software and technology development; marketing and customer relationship management (CRM); sourcing and procurement from suppliers, as well as range of individual customers; event management and production, and training, development and employee engagement. The Company's subsidiary undertakings include Game Retail Limited, Game Stores Iberia SLU, Multiplay (UK) Limited, Game Esports and Events Limited, and Game Digital Solutions Limited. more »

LSE Price
36.77p
Change
-1.7%
Mkt Cap (£m)
63.6
P/E (fwd)
n/a
Yield (fwd)
n/a

Mothercare plc is a retailer for parents and young children. The principal activity of the Company is to operate as a specialist omni-channel retailer, franchisor and wholesaler of products for mothers-to-be, babies and children under the Mothercare and Early Learning Centre brands. The Company's operating segments include the UK business and the International business. The UK business segment includes the United Kingdom store and wholesale operations, catalogue and Web sales. The International business segment includes the Company's franchise and wholesale revenues outside the United Kingdom. Its clothing and footwear product includes ranges for babies, children and maternity wear; home and travel includes pushchairs, car seats, furniture, bedding, feeding and bathing equipment, and toys are mainly for babies. It operates in the United Kingdom through its stores and direct business, and across the world in over 60 countries through its international network. more »

LSE Price
18.7p
Change
-3.0%
Mkt Cap (£m)
32.0
P/E (fwd)
7.6
Yield (fwd)
n/a

Trakm8 Holdings PLC is a Big Data company. The Company, through its subsidiaries, manufactures, distributes and sells telematics devices and services. The Company focusses on owning the intellectual property that it uses in its products and solutions. It supplies its customers in the fleet management and insurance sectors across the United Kingdom. In addition, the Company provides hardware devices that can be integrated into third party telematics or Internet of Things (loT) solutions. It offers Configuration Manager, Product Datasheets, Radio Frequency Identification, Telematics Devices, Vehicle Connectivity and Accessories, among others. Its portfolio of solutions includes Trakm8 ecoN, Trakm8 Tacho, Trakm8 Secure, Trakm8 Logistics and Trakm8 Insure. Its portfolio offers telematics solutions, including dashboard cameras that enable customers to record driving incidents and mitigate the risk from crash to cash accidents. It provides bespoke solutions and engineering support services. more »

LSE Price
91.5p
Change
 
Mkt Cap (£m)
31.5
P/E (fwd)
8.8
Yield (fwd)
n/a



  Is GAME Digital fundamentally strong or weak? Find out More »


18 Comments on this Article show/hide all

Cowlid 13th Apr 1 of 18
1

Hi Paul

Thanks as usual for all your efforts for the little people! Whilst the reply from the Chairman is private, were you satisfied with his response?

Dave

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mammyoko 13th Apr 2 of 18

Bravo re Trakm8 Holdings (LON:TRAK) , Paul. It will be interesting to see if persistent highlighting of poor RNS will have an impact. I hope that people who read your blog steer well clear of companies that opt for opaque communication. It's almost impossible for us to tell whether it is a blatant attempt at manipulation or incompetence. However, there are so many good companies out there that have nothing to hide that it's simply not worth investing in companies who are either unable or choose not to communicate basic information clearly. Companies that have something to hide will continue to attempt to do so because there are too many investors out there that want to believe a good story even when they half suspect that that's all it is. That seems to include a fair proportion of the so-called professional investment community. Sadly, crime pays in the investment world!

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Camtab 13th Apr 3 of 18
1

Hi Paul,
With regard to GMD, can you explain the Accounts Payable entry in Cashflow and BAlance Sheet? Seems to me going back over 5 years they wrote this down hard and subsequently it has been rising gradually to around £47m now. This certainly limits my interest in the business (noting it went in to Administration into 2012. Just interested in your perspective if you are willing to give it.
Best wishes

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gus 1065 13th Apr 4 of 18

Hi Paul.

Thanks for the commentary on Trakm8 Holdings (LON:TRAK) . I recall your run in with TW a couple of years ago on this one. I think there’s a good business trying to break the shackles here but they just can’t seem to live up to the early promise when the share was an AIM darling. Personally I don’t see any malice in the Trakm8 Holdings (LON:TRAK) release, just a disconnect between what they’re trying to communicate and the message that actually comes across.

On the topic of voicing concerns about Investor Reporting clarity (or otherwise), there are a few awards/wooden spoons up for grabs in the upcoming Mello awards. Hope it’s OK to post here a link to their voting form (which also includes various nominations for small cap commentators etc., for which you and Graham have been deservedly nominated).

Gus.

https://docs.google.com/forms/d/e/1FAIpQLScz-SxqIEhhcH76g46EIVa6z7qsq_vdeSXoD7uyq6YkIg6vrQ/viewform

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Howard Marx 13th Apr 5 of 18
3

In reply to Camtab, post #3

Camtab

The turnover (COGS) / accounts payable ratio at GAME Digital (LON:GMD) is normalising from very high levels during the prior bankruptcy that you refer to.

This is a sign of supplier confidence, not supplier concern.

The last full year ratio for GAME Digital (LON:GMD) was 12.2x. 

By comparison for Tesco (LON:TSCO) the ratio was 6x. 

So GAME Digital (LON:GMD) arguably has scope to see it's accounts payable to rise further in  future years.

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john652 13th Apr 6 of 18
6

Maybe we can have a sticky 'wall of shame' for all companies that provide purposely poor updates, be it unclear, badly worded or leaving out key information.

For me it's a big red flag if someone running the company either doesn't care, or so arrogant they believe they are going to fool the readers, you really have to ask how trustworthy they are in running the company.

The alternative is of course they really do struggle with plain English and are actually quite stupid

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Snoo 13th Apr 7 of 18
1

I think the Belong concept has some potential, although I'm sceptical just how it can be implemented within Sports Direct.

The two businesses seem to operate opposite trading hours. The premium customers, ie those who take gaming really seriously; are not going to be playing in the daytime. As we can see, some of the Belong venues open quite late, and for some I would be sure demand goes past midnight.

A lack of food/toilet facilities in the stores might hamper longer sessions. The kind of size needed seems to be to bigger than what the average Game store has.

I guess I would be hoping that this could evolve into something not too dissimilar to the manga cafes they have in Japan, whether it'd be profitable enough here is another thing.

Blog: Passive Investor
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bsharman 13th Apr 8 of 18
4

More great analysis and commentary Paul - thanks. I agree that the change in GAME Digital (LON:GMD) ownership is positive and I was very pleased to see Miton buying 13%. The gaming / esports market is large and growing very strongly. This is also a sweet spot because the high street is currently trying to adapt and change and become more of a destination with events, experiences and leisure being very much part of that strategy. Perhaps the larger shopping centre owners such as Intu Properties (LON:INTU) will offer incentives for experienced based businesses to attract footfall which will benefit other traditional venues. I'm looking forward to having a go at an 'escape game' (www.escape-london.co.uk) in the near future and i understand that (https://investors.escapehunt.com) Escape Hunt is listed.
Have a good weekend all,
Ben
@BenSharman (twitter)

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IGotPoesJacket 13th Apr 9 of 18
2

Thanks for taking the time to revisit these companies.
I don't hold but I love seeing you lay everything out and explaining how you come to conclusions.

Have you thought about doing seminars? You could do an "scvr live", and get one of the attendees to do the typing to save aggravating your rsi :)

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threeputt 13th Apr 10 of 18
1

I don't hold Trakm8 Holdings (LON:TRAK) at this point but my immediate reading of the phrase in question:
'Profit warning but with the strength of recent order intake the outlook for next year is good'

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xcity 13th Apr 11 of 18
1

I think I read the Trakm8 Holdings (LON:TRAK) statment the same as other people, but wasn't sure it was actually a profit warning. Expectations not being met, yes; but had they ever been clear enough for a definite profit figure to have been expected? Also wasn't convinced that the 'warning' was mild; I thought 'at least mild, maybe moderate'.
The danger of being vague is that people will look for the worst it might be.

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bestace 13th Apr 12 of 18
11
  • New BELONG format works well, and has a payback period of 16 months - so this share should really be seen as a roll-out of a new, successful, experiential leisure format. The stock market hasn't cottoned on to this yet, and is (in my view) mis-pricing GMD as a legacy retailer.

Completely agree with this apart from the 16 months figure (it's now more like 2-2.5 years). As long as the legacy retail business can continue to wash its face and/or fade into managed decline, the focus should be on the BELONG concept and whether it can be rolled out in a meaningful and profitable way. I don't think the markets have fully grasped that yet.

So to my mind any focus on console sales, the cyclicality of games and console release dates, downloads vs physical sales vs Steam, retail margins, the dying high street etc. is mostly irrelevant noise.

Clearly the experience from the first 19 sites has taught them a lot about what works about the concept, so it's worth looking at the unit economics as they present it now compared to how they presented it when the BELONG concept was first launched. 

This is from the interims presentation 12 months ago:

5ad0fbbe42c7eGMD1.png

And this is from the interims released two weeks ago (I've cropped it to fit on the page):

5ad0fbe73c320GMD2.png

So from capex per site of between £50k - £100k and a 6 - 18 month payback, we have now evolved to larger sites where capex is £350k per site with a 2 - 2.5 year payback. On the face of it more capex and a longer payback period sounds like a worse proposition, but over the longer term the unit economics appear to stack up more favourably if they can finance the up front capex.

The initial model from last year implied a contribution per site of somewhere between £67k and £100k whereas the latest iteration implies contribution per site of £150k - £175k to GAME Digital (LON:GMD) even after Sports Direct have taken their cut. The operating margin has increased from a 12% target to 23%, and again that's after SPD have taken their cut.

Looked at in these terms and focusing specifically on the increased, up front capex requirement goes some way towards understanding the rationale for the Sports Direct collaboration. Under the initial model for BELONG they would have required around £4m to fit out 50 sites which I think could have been comfortably financed from internal cash flows and from their existing facilities. Under the latest model they are now talking a fitout cost of £35m to open 100 new sites.

So in broad terms that’s nearly an order of magnitude more of up front costs, but in return they will be generating annual contribution of c.£20m which is around 4-5x what the initial operating model implied.

Could Game have financed the £35m upfront cost themselves? Yes, possibly.

They could have done a discounted placing, but with their share price languishing at less than NTAV, would a massively dilutive placing really be beneficial to shareholders?

They could have used their existing debt facilities or taken on more debt, but that may have left them over-geared in an uncertain economic environment for retailers, and there are questions about how much of their existing facilities are required for the legacy business.

Or they could have gone for a self-funding roll out approach, but that would have taken a lot longer to execute and with the legacy retail business winding down and with such a short average lease length perhaps they felt they don't have sufficient breathing space to take the slow and gradual approach.

So having initially thought the Sports Direct deal was terrible for GAME Digital (LON:GMD) shareholders, I'm now beginning to think there is an arguable case for it. On balance though I still think £3.2m was a crap price for GMD.

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gus 1065 Sat 6:50am 13 of 18

Hi bestace.

Interesting analysis of the GAME Digital (LON:GMD) situation. I had a similar (if less well grounded on hard numbers) thought process at the time of the original Sports Direct tie up. While I agree the £3.2m price seems low ball, in the context of the wider transaction I saw this as a necessary hook to get SPD in.

In my view, it’s almost like a “merger” with both sides contributing assets/know how/ cash to the Belong JV. E-gaming is (potentially) about to take off big time across the UK and probably further afield as well and we’re in a land grab stage where the first mover has the chance to build a brand/competitive moat and capture a large part of the market before other parties stake out the same ground. Could GAME Digital (LON:GMD) have done it on its own? Possibly, but with a large and reluctant shareholder in Elliot that didn’t want to help bank roll the expansion and it’s history of past failures making a substantial fundraising less than certain, the SPD deal gives them the chance to get to critical mass quickly even if it means giving SPD a share of an albeit bigger value cake.

Overall, I think it’s still a pretty risky investment proposition for GAME Digital (LON:GMD) shareholders but with the potential for a high upside and a better chance of success with SPD’s resources (and if needs be Mike Ashley’s personal wealth) on board. With the Elliot overhang now out of the way replaced by a decent group of institutional investors with material stakes (who presumably had pretty good access to information in doing their due diligence) rather than a single SPD majority bloc holding running the show, I think GAME Digital (LON:GMD) is now in a pretty good position to take this venture forward. All they have to do is make it work ....

Gus.


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johnsmith68 Sat 7:00am 14 of 18
2

Thanks Paul and everyone else for contributing so much great analysis on GAME Digital (LON:GMD). I agree with Gus that this is a risky investment since everything hinges on management's ability to execute a highly complex transformation alongside a daunting number of lease negotiations but if they can pull it off, the upside could be enormous. It's early days and there are as yet only a handful of reviews for a handful of the new Belong stores but so far all of the reviews I checked on TripAdvisor are overwhelmingly positive which is comforting at this stage - I shall keep an eye on these as early indication of how customers are reacting to the new format. I hold and am optimistic especially with Miton backing it too now.

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Richard Goodwin Sun 12:13am 15 of 18

In reply to IGotPoesJacket, post #9

@IGotPoesjacket Paul is doing so at Mello 2018 

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thos Sun 6:45pm 16 of 18

re Trakm8 Holdings (LON:TRAK) technical breech of the Companies Act. The real issue here is that they both failed to file interim accounts and then paid a dividend when there were insufficient distributable reserves. As a minimum this is sufficient sloppiness to keep well away from owning shares in this company (or being a trade creditor).

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sharw Sun 7:37pm 17 of 18

In reply to bestace, post #12

I am still trying to understand the GAME Digital (LON:GMD) model. From the presentation slide you helpfully inserted it would appear that for every £1 spent on playing the punters are expected to pay £2.50 on food, beverages and hardware etc. Looking at Cineworld (LON:CINE) it is the other way round - for every £2.50 spent at the box office £1 is spent on retail (and it is more difficult to eat popcorn while playing a game than watching a film). Perhaps these figures include income from an attached Game store?

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blondeamon Sun 8:03pm 18 of 18

For anyone interested in the progress on the business side on Trakm8 Holdings (LON:TRAK), you can find my new article here:

https://www.stockopedia.com/content/trakm8-shaping-up-to-become-a-global-telematics-player-353508/

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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 Stockopedia.com on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »

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