Small Cap Value Report (Fri 15 May 2020) - BOO, KWS, W7L, DTG

Good morning, it's Paul here.

Fridays are usually slow for news, and I'm pre-occupied with macro views, given that we're going through absolutely unique circumstances. There has never been a time where the economy has been shut down for a while. Not in living memory anyway. Maybe at times when they didn't know what "the economy" was?

Hence the focus here has inevitably changed a bit from ploughing through largely irrelevant pre-covid company results, to guessing about what the future might hold.

Estimated timings - very, very leisurely. I'll do what I can by lunchtime. There is literally nothing of interest in the small caps space today, so I'll add a few sections on stuff I missed earlier this week. I'm aiming to finish by about 3pm.

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Boohoo (LON:BOO)

A long time favourite SCVR share this one! Now far too big for my remit (market cap over £4bn), but it's good to keep an eye on what is a truly exceptional business. I still see this as a major long-term winner, and want to get back in at some point.

There was an unexpected announcement last night, saying it was raising close to £200m . Unexpected, because it is already sitting on a cash pile of £240.7m.

Another update this morning says it raised £197.7m at 340p per share. that's a fairly small discount (the current price is 356p, up 4.5p today). Dilution is small, so I don't think private shareholders need to worry about the terms of the deal. It would be good if private investors could be included in fundraisings too, via the excellent Primary Bid platform. Particularly for a consumer-facing brand like BOO, it should be actively courting private investors.

The additional cash is for acquisitions. I imagine there are likely to be numerous opportunities for BooHoo to buy up well known brands that fail in the High Street. BooHoo then buys the brand, and bolts it onto the existing BooHoo platform. After 2 or 3 years growing the brand, it's another profitable element to the group.

The sky's the limit, in terms of what this group can achieve. It's already got about 6 brands, and that could conceivably keep growing into substantially more.

The Group intends to use the net proceeds of the Placing to take advantage of numerous opportunities that are likely to emerge in the global fashion industry over the coming months. The Group continues to review a number of possible M&A opportunities and will update shareholders as required.

Trading update - good so far. However note carefully the bit about competitor activity. What this means, is that when physical retailers re-open shortly (from 1 June), then BOO will suddenly have competition again from the whole of the High Street. Moreover, the High Street is probably going to have to launch the sale of the century, to shift their spring/summer ranges at sale prices, therefore this could mean BOO might struggle over the next few months, possibly?

At the time of the Group's preliminary results announcement on 22 April 2020, the Group noted that since mid-March, trading had been mixed, as a result of the impact of the COVID-19 pandemic, initially with a marked decrease in the year-on-year growth rate. Performance then improved during April, delivering improved year-on-year growth of group sales.

The Group is pleased to update shareholders that trading into May remains robust. The Group does, however, remain cautious regarding the outlook, as a result of the uncertainty caused by the COVID-19 pandemic together with the impact of lifting lock-down restrictions and the potential influence on competitive behaviour for the remainder of the year.

Given the uncertainty generated by the continually evolving COVID-19 pandemic, it is not appropriate to provide guidance for the financial year ending 28 February 2021 at this stage.

That sounds to me like there could be a profit warning later this year from BOO, possibly, as High Street competitors clear stock at knock-down prices. If so, great, as I'm looking for an opportunity to buy back in. I missed the boat on the recent plunge in March, as I was hanging on for a slightly lower price, then it shot back up again like a scalded cat. Drat!

Another point to consider is that High Street retailers are likely to focus much more attention on their own online sales. The best ones, like Next (LON:NXT) and Joules (LON:JOUL) are already doing 50%+ of their business online. Next has, for several years, had a roadmap to closing potentially all of its physical stores. Therefore I feel that BooHoo may not have quite such an easy ride in the coming years, as competition intensifies, not so much from start-ups, but from existing retailers that can now see the logic in moving predominantly online, in a world where covid has demonstrated that physical stores are so vulnerable.

Management is tremendously ambitious at BOO, and serious about building a multi-billion global business. It's highly profitable & cash generative, a really tremendous business.

Maybe they could put us French Connection (LON:FCCN) shareholders out of our misery, and buy that brand/licensing business, and put the stores into administration? There again, BooHoo are not known for over-paying for anything!

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Keywords Studios (LON:KWS)

This company also raised money last night, in a placing (called "accelerated book build").

£100m (before fees) has been raised at 1450p per share. That's a bigger discount than private investors would probably want. The share price is down 70p to 1470p today. It's about a 6% discount, which I suppose isn't too bad. About 10% dilution, again not top bad.

I'm amazed at the market's willingness to support numerous fundraisings. Where is all this cash coming from? Will it run out, given how many companies need to raise funds? I think things could get sticky for small, struggling companies, especially if there's a second wave of covid in the autumn. Companies really need to get their fundraisings done now, as it might be too late by the autumn if a negative scenario happens with covid.

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Warpaint London (LON:W7L)

Market cap £33m

This is a makeup company.

I last reviewed its trading update pre-covid, here on 6 Feb 2020 which is a useful recap. I thought it looked potentially interesting, but couldn't understand why broker forecasts kept falling.

19 March - it played down the impact of covid, saying it had only had a limited impact on sales. But this was before the shutdown of course. No supply chain issues with China.

9 April - another update. Trading was OK to end Feb. Lockdowns have now caused "a substantial reduction in group sales", due to closure of many customers' shops. Cost-cutting done. Furloughed 84 of 115 UK staff. Guidance withdrawn. £3.3m cash on hand at 8 April. Thinks it could last to end 2020 without any extra funding, if lockdowns continue. No divi.

13 May - final results for FY 12/2019. Cash at 30 April of £3.7m (up £400k from 9 April, strangely). Adjusted profit for 2019 fell to £5.6m (PY: £8.4m). Margins seem to be coming under pressure, and increased costs.

My opinion - it does indeed have a strikingly strong balance sheet. Therefore solvency shouldn't be an issue. My main problem with this company, is that performance was deteriorating well before covid struck. I want to buy shares in companies that were doing really well before covid. This share doesn't fit that mould. However, the valuation is now starting to look quite attractive, given how strong the balance sheet is. On balance, I'll leave it alone - as with many companies, I think there's a high likelihood that shares could sell off sharply when investors actually see the interim numbers later this year, which are likely to be horrible.

Broker forecasts don't seem to have been updated for the impact of covid, hence we need to ignore existing forecasts. What on earth is going on with brokers? They seem to have given up trying to forecast how companies might perform, just when we need that information the most. I suppose many companies probably want to conceal the true extent of their losses this year, to avoid crashing their shares even more?

As you can see from the 2-year chart below, the impact of covid has roughly halved the price from c.80p to c.40p. That was really just the cherry on the top of an already bitter-tasting cake or flan.

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Dart (LON:DTG)

Quick comment - it flagged that it needed more liquidity.

14 May 2020 - it announced that it has been confirmed for the Bank of England COVID Corporate Financing Facility (CCFF). It has been given a £300m liquidity line, currently not being utilised.

The CCFF is designed to support liquidity among larger businesses who are capable of demonstrating that they make a material contribution to the UK economy and are able to display sound financial health, equivalent to an investment grade rating, prior to the economic shock caused by the COVID-19 pandemic.

My main worry here, is why does it need this facility at all? The balance sheet looks so strong. The only conclusion I can come to, is that the customer deposits must have evaporated, leaving it potentially short of cash. Plus grounded planes are very expensive. Plus there could be an issue with fuel hedging possibly?

Bookings - sounds positive, but no figures given;

Though still early, we continue to be encouraged by the volume of our customer bookings for summer 2021 and their associated pricing...

My opinion - I'm on the fence here. How long will it take for air travel to get back to normal? Will it ever?

I think that the current share price of 482p might look amazingly cheap if we imagine we're in 2023 or 2024. However, the trouble is that the share price could crater between now and then. So I'm currently too nervous to buy back in.

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I'll leave it there for the day, and the week. Enjoy the weekend!

Best wishes, Paul.