Small Cap Value Report (Fri 13 July 2018) - DPEU, ASHM, THAL, TSTL, Amortisation

Friday, Jul 13 2018 by

Good morning!

Today's assortment looks a bit like this:

DP Eurasia NV (LON:DPEU)

  • share price: 177.5p (unch.)
  • No. of shares: 145.4 million
  • Market cap: £258 million

Trading Update

(Please note that I currently own DPEU shares.)

This is the master franchisee of Domino's Pizza in Turkey, Russia, Azerbaijan and Georgia.

It's the smallest position in my portfolio due to the fairly obvious geopolitical risks and also its speculative nature as the Dominos brand is rolled out in Russia. It remains to be seen to what extent it will catch on.

So far, the signs are pretty good. Small, speculative positions like this in my portfolio require me to make another decision at some point: to add more (when I'm more confident that it's going to succeed) or to dispose of it (when I am pretty sure that it will fail).

I haven't made that decision with DP Eurasia yet. I want to gradually learn more about the company and its progress as it produces more and more results. I also want to be careful since it has only been listed for about a year, and I am cautious about recent IPOs. We often get an accident in the first year or two.

It's worth noting that DPEU's Turkey business is already established as the #1 pizza delivery company in that country, so that part of the group is much less speculative than the rest of it.

System sales - these are sales made to customers by DPEU's corporate and franchised stores. In other words, it's the revenue that DPEU would have achieved if all stores were corporate owned and none of them were franchised.

This looks satisfactory to me.


System sales in Russia are up by nearly 70% (measured in Turkish Lira). 1 Lira = 16 pence.

Russian sales are now 30% of the total, up from 23% last year.

Long-term, if the roll-out succeeds, Russia will hopefully be making a…

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

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DP Eurasia NV is a Netherlands-based company, which operates as a franchisee in Turkey, Russia, Azerbaijan and Georgia of Domino’s Pizza. The Company offers pizza delivery and takeaway/eat-in facilities at its more than 570 stores that include corporate stores and franchised stores, which together are referred to as its system stores. The Company offers pizza products at a range of price points and adapted to local tastes. It also offers complementary products such as chicken, other side dishes and desserts, some of which are developed by the Group’s centre in Istanbul and subsequently adopted by other franchisees of DP Inc internationally. The Company also operates an online ordering channel. 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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Thalassa Holdings Ltd is a holding company. The Company is focused on providing marine geophysical services, autonomous underwater vehicle (AUV) research and development and homeland security and real estate services. Its directly owned subsidiaries in the energy services industry include GO Science Group Ltd (GO), which is an autonomous underwater vehicle research and development company with a subsidiary Autonomous Robotics Limited. more »

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

42 Comments on this Article show/hide all

Graham Fraser 13th Jul '18 23 of 42

Thanks for looking at Thalassa Holdings (LON:THAL) Graham. You have put it in a nutshell, massive discount to cash but what will Soukup do with the money ? And perversely the more shares he buys the tighter his control is of the company,arguably thus making it more dangerous for minority shareholders.
Having said that, I own the shares and will stay with them, I am betting that the boss will try to prove the doubters wrong, and if you are a bear of the market this could be a beneficiary of a fall in stock prices,allowing them to make a good purchase.

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Graham Neary 13th Jul '18 24 of 42

In reply to post #381964

Hi Steve, the TSTL SP appears to have recovered a bit this afternoon? Nice stock, wish I knew more about it. G

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FREng 13th Jul '18 25 of 42

In reply to post #381989

Graham, Thanks for the info about £UCG

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TMFMayn 13th Jul '18 26 of 42

In reply to post #382099

Hi Steve, the TSTL SP appears to have recovered a bit this afternoon? Nice stock, wish I knew more about it. G

(shameless plug for my blog)

A list of TSTL posts:

Quick thoughts on today's RNS:

I am going to the open day and hope to provide a blog post on that.

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Beginner 13th Jul '18 27 of 42

An announcement at 1231 from Fletcher King (LON:FLK) .

The profits for this year are a considerable miss (down by 66% on revenues reduced by 25%). For anyone thinking of buying the spread is c15% and there are few shares available. However on the positive side the yield is still 3%, and the company still owns two office blocks in London, which it is looking to sell and return the profit to shareholders. The balance sheet remains totally bulletproof. If it falls far enough this could interest anyone seeking income.

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Graham Neary 13th Jul '18 28 of 42

In reply to post #382114

Thank you Maynard! G

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andrewjames 13th Jul '18 29 of 42

In reply to post #382099

The Tristel (LON:TSTL) share price has always bounced around quite a lot. The market reaction might be related to the fact that the chairman is retiring (but we knew that was going to happen soon and people moaned before that that they should have appointed someone else - I happen to disagree with that view), that no special dividend is being declared (good - they have better uses for the cash) or that there has been no massive outperformance compared to previous expectations.

Who cares? This is a roll out of a range of tried and tested products which is not solely reliant on the North American market (and Canada should not be forgotten), as they have lots of other markets to penetrate. On the chairman issue, I think that they have one and very arguably two strong internal candidates, before looking at the rest of the market. On that score, I wonder if someone like Tim Jones of Treatt (LON:TET) has any spare time.

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JohnEustace 13th Jul '18 30 of 42

I see Duke Royalty (LON:DUKE) have announced after the close of play that they have raised £44m (£42m net) from a placing to enable them to increase their royalty funding. The placing was at 44p against a share price of 47.8p at the end of trading.

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DJCP 13th Jul '18 31 of 42

"It's 3pm on Friday, and the weather is nice, so perhaps this is not going to get as many reads as it otherwise would. But I think it's important."

I glance at SCVR during the day, but read more thoroughly in the evening/night, and usually check back the following day to see if any more comments have been added.

I'm also tending to leave DYOR until the weekend, so I have more time to concentrate, and with some stocks mentioned here, the initial uplift quite often subsides, and IF i want to invest, I can at pre-SCVR prices :o)

Also, off-topic, but as part a recent long-overdue folio analysis, I've cut back from 26 to 16 stocks, and at present have an unheard of (for me) double-figure percentage of cash !
I believe you're (Graham) quite concentrated on a few stocks, and my top 5 now account for 50% of folio, and I have only 3 stocks that I would class as punts (although investors here would consider many more as pure gambles ! lol)

Enjoy the WC 3rd place play-off tomorrow and Final on Sunday, if you're into footy. Not long before the English season re-starts :o)

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Steves cups 13th Jul '18 32 of 42

Your comment on the treatment of amortisation of acquired intangibles prompts me.
There is really no difference between buying a tangible fixed asset and an intangible one. Both have to be written off over their useful lives and both cost real cash when they are purchased.
My take on companies results is that you take this kind of adjustment with a pinch of salt and work out your own profit figure. You also have to gave a sense of scepticism for those companies who acquire a lot of businesses to grow their profitability. Sooner or later impairment will raise it's head. Then people say "Ah it's non cash" so it doesn't matter. People forget that they paid cash so it's a bit of shareholder value destruction. Unfortunately you need to go back a few years to track them all.

Graham, over the last year or so I have realised your attitude has mirrored my views to some extent, so keep going on about the obvious even if it means some readers ignore or turn off

All the best


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Andrew L 14th Jul '18 33 of 42

Graham, Interesting end of day accounting point. I think there may be scope to ignore the amortisation it just depends what it relates to. My understanding is this:

1) A company creates intangibles: If these are measurable and likely to translate into a profit they are required to be capitalised rather than expensed. So BMW spends on R&D and creates an intangible asset that is then amortised over time. This fits in with the matching principle of accounting. I.e. you match costs to the period that the revenue is generated.

2) A company acquires intangibles: This is more messy. Generally acquisitions are made up of tangible asset and goodwill. This is where goodwill is the premium paid over tangible assets. Intangible assets don't tend to factor much in the acquisition arithmetic.

Goodwill isn't written off but intangible assets are. Begbies had goodwill of £50.1m at April 2017, software assets of £1.7m and intangibles relating to acquisitions of £19.2m. The latter can be broken down as customer relationships £5.4m and customer contracts £1.4m. Not quite sure what the rest is from. The remaining useful lives of intangibles relating to acquisitions is 1 and 9 years.

Personally, this looks like an accounting convention to me. Is it really the case that the customer relationships of the businesses that have been bought will cease in less than 9 years? The whole point of the acquisitions is to buy companies and maintain the customer relationships. Accounting sometimes errs on the side of being conservative and it looks like that is the case here.

If we look at the existing Begbies business and it doesn't create intangible assets related to building up customer relationships. In less than 9 years all of these intangible assets will be written off in any event. If you think that Begbies can maintain the relationships of the businesses it has bought then I would ignore the amortisation of intangibles.

Begbies only has created a small amount of intangible assets itself related to software. I personally think that the company has been told by an audit firm to have a lot of intangibles on acquisitions. This is because these are charged to the P&L and it seems more conservative. I.e. the assumption is that the intangible assets - customer relationships with companies it has bought - won't last over time.

I reckon it is probably worth ignoring this because no company is in business to lose clients. This is whether it is its own clients or clients it has acquired as part of an acquisition. Is it really realistic to say that Begbies will lose the clients of the company it has acquired?

So I would personally go with the treatment by the company and ignore the amortisation of acquired intangibles. It is of course possible that Begbies does lose customers from the businesses it has bought. Perhaps the key staff will leave and take their clients with them. This is probably why the accountants have been firm in this instance. It seems a very extreme assumption to make in my view.

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Effortless Cool 14th Jul '18 34 of 42


I have to say that I wholeheartedly disagree with your views on valuation of intangibles and their amortisation. In my opinion, if you want to beat the market, you need to be smarter than the market, and that means looking through the “fair value” accounting entries to understand the true underlying economic value.

The first accounting entry in your example is cash -£10m, intangibles +£10m. In subsequent years, we get intangibles -£2m (for five years only), cash (profits) +£xm, x being whatever profits the intangible assets generate each period (£2m in the first year).

The first switch between cash and intangibles is neutral to fair value valuation because an accounting convention requires it to be. It is not probably not neutral to the economic value, which is -£10m cash, plus the present value of future cashflows generated by the asset. Subsequent amortisation is driven by a standard accounting assumption as to the amortisation rate, which is unlikely to accurately match the cashflows generated by the asset.

To extend your example, say I pay £8m for exactly the same asset that you have paid £10m for. Under fair value accounting, you get a £10m intangible asset and I get an £8m intangible asset. This is logically incoherent. If your valuation is right, then I have created £2m of economic value, if my valuation is right, then you have destroyed £2m of economic value. As I said earlier, the most successful investors surely need to look through the reported numbers to get a real understanding of value?

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rhomboid1 14th Jul '18 35 of 42

In reply to post #382219

I always try to take a view on both the quality of & the price paid for acquisitions..especially when the acquirer can add value immediately by the nature of their business being different to that of the seller example is IQE (LON:IQE) recently acquired some ‘stranded’ IP in the form of patents for $500k from a seller who was no longer able to utilise them

They are now starting to utilise them: they could now subject to an ‘in use’ revaluation uplift quite legitimately ..

Other examples are where company A has a brand that is defunct but has lingering brand recognition

If they sell the brand to company B who has a product portfolio & route to market that would benefit from the brand then the transfer from A to B creates immediate value that accounts seldom capture correctly UP Global Sourcing Holdings (LON:UPGS) is a classic example of this occurring

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JohnEustace 14th Jul '18 36 of 42

In reply to post #382189

"no company is in business to lose clients"

True, but in Begbies case as insolvency specialists aren't they mostly winding up their clients as opposed to providing an ongoing service to them?

In which case I think it's the people that come with the acquired businesses that are the key asset.

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Andrew L 14th Jul '18 37 of 42

In reply to post #382244

That is a good point. But then if the people that come with an acquisition continue to win new insolvency clients then it is pretty much the same thing. But it is a fair point that an individual insolvency client is not exactly a long-term relationship. On balance I would probably ignore amortisation of acquired intangibles still. It assumes that the people from the company you have acquired will not be able to win any new business. I can understand why it is there i.e. to be conservative. But I doubt it is relevant even for an insolvency practitioner.

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Gromley 15th Jul '18 38 of 42

In reply to post #382244

"no company is in business to lose clients"
True, but .......... aren't they mostly winding up their client

Apologies for veering off-topic, but I just had to comment there that I thought for a moment that you were talking about Three Mobile!

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mojomogoz 16th Jul '18 39 of 42

Thanks for the accounting detour and discussion - I'm very happy for you to do more of this.

FWIW my view is that investors should generally write off acquisition goodwill. That doesn't mean that acquisitions are always bad. There is just little likelihood that persistence in intangible value or valuation by management is correct.

Generally intangibles should be given much less value by investors than recorded. The recording is sensible accounting convention but rather bogus on a prospective economic perspective.

Over time the value that is generated from intangible assets will likely morph hugely over time. Take customer data bases as an example. The value they gave to business 5 years when acquired are entirely different today but the intangible value will be carried if the general business is performing well and growing. Or take capital investment (particularly in technology)...the future value from this is really quite unrelated to the money spent on developing it and is as much a function of sales, management competence, cycles, etc.

This means many businesses have low or negative book value. That's absolutely fine and just makes it clear you are buying prospective earnings/cash with much less safety net than the accounting arithmetic says

Intangible is really a combo of management quality, luck and exposure to cyclicality (be it broad economic or more specific industry/product related). It is very vulnerable to writedown for whatever reason a business goes through a rough time and very likely to be obsolete as a marker of value after a good extended period of performance. 

The nature of acquisitions and investment is that they tend to take place when times are good and expectations are there's likely to be hubris in the 'invisible' value.  I like stocks that have gone through 'dehubrification'

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Andrew L 21st Jul '18 40 of 42

In reply to post #382244

To follow up on the amortisation discussion from before Begbies Traynor (LON:BEG) and I am still of the view that we should are probably right to ignore the amortisation of acquired intangible assets with regard to Begbies Traynor (LON:BEG). While it can be useful to be conservative in terms of the approach used it also has to be accurate and fair. It is clear that acquired intangibles are accounted for in a different way to intangibles the company builds up itself.

Acquired intangibles are put on the balance sheet and amortised. The business doesn't create much in the way of intangibles itself it just expenses costs related to them as they arise. So there is a double standard. But in any event Begbies Traynor (LON:BEG) will be paying costs to help ensure the acquired intangibles retain their value. I.e. training staff from the new business, finding new clients etc. So to amortise acquired intangibles doesn't really make sense.

Interesting that Leon Boros seems to agree. Have a look from 11 minutes in at this video. I just don't think being uber conservative helps to really determine the value of a business. I.e. by going with the accounting numbers in this instance and recognising the amortisation of acquired intangibles. to get a better understanding you would need to look at accounting principles and the relevant accounting standards:

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Bonitabeach 21st Jul '18 41 of 42

In reply to post #382244

"no company is in business to lose clients"

True, but in Begbies case as insolvency specialists aren't they mostly winding up their clients as opposed to providing an ongoing service to them?
In my experience of insolvencies and the appointment of administrators the "client" is usually a bank or other corporate finance provider. Administrators go out of their way to keep the "client" happy, sometimes to the detriment of other creditors.
I think it's the people that come with the acquired businesses that are the key asset.

The people are key: whether assets or liabilities depends on the people!


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Andrew L 21st Jul '18 42 of 42

In reply to post #384009

Exactly. So the client is in reality a bank and so business can be repeat in nature. Accounting in general tends to err on the side of being conservative. This is an example of that. However, it doesn't give us a clue to the underlying value of the business to following the accountancy rules in this instance IMO. If we do we have double cost accounting.

1) The amortisation of acquired intangible assets
2) the costs associated with maintaining those assets. I.e. retaining key people, training, marketing for new clients etc etc.

As Boros highlights in the video a large part of why they amortise acquired intangibles is due to double entry book keeping. If you acquire a business you have paid a cost and that has to go somewhere in the balance sheet as an asset. You either have it as goodwill, an intangible or an asset. Accountants are saying it must be an intangible as its value may be finite. In reality this is not really true as no one buys a company on the expectation that people in the acquired business will not be able to win any new business. That is a bizarre assumption to me.

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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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