Small Cap Value Report (Fri 17 Jan 2020) - CCT, GYM, OPTI, HFD, WRKS, MOSB, CLL, LAM, VRE

17th Jan '20 by Paul Scott

71 comments 9593 reads

Good morning, it's Paul here with Friday's SCVR. A reminder for new subscribers, that I post a placeholder article before the market opens (when I remember!) for your comments post 7am, whilst I'm preparing the main article based on the day's newsflow. Finish time is 1pm, anything after that is a bonus.

A reader commented that Sosandar (LON:SOS) (in which I hold a long position) trading update should be issued today. Don't worry, I'll be on the case first thing! If it's straightforward to understand, then I'll post a quick view pre-8 am.

Alas, no update from Sosandar as yet (at 07:17) so looks like we jumped the gun on this. It must be coming out next week instead.

Estimated time of completion - I should be done by 1pm today. There's hardly any news today. However, there's plenty left over from yesterday for me to cover, so it'll be a full report here as usual. See the header for the company tickers.
Edit at 12:47 - today's report is now finished.

Character (LON:CCT)

Share price: 302p (down 21% at 08:09)
No. shares: 21.4m
Market cap: £64.6m

Trading update (profit warning)

This company designs & distributes toys. Feast your eyes on acres of pink plastic on its website here. CCT has an unusual 31 August year end.

Key Christmas trading has not gone well, although this sounds like it was due to external factors rather than anything being wrong with its products;

The 2019 Christmas trading period was extremely challenging with the total toy market in the UK contracting for the second successive year, and those conditions will impact our results for the first half of the financial year.

Sales of our core products were down against the comparable period last year. Nevertheless they performed well with good sell through at retail in the UK.

The last paragraph sounds contradictory, and could have been better worded. I think what they're saying is that retailers bought fewer toys from CCT, but what they did buy sold well in stores.

H2 outlook - sounds good, so maybe this is a buying opportunity on today's c.20% share price drop? It depends how much reliance you're prepared to put on management expectations?

We enter the 2020 calendar year with a…

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Rusty2

18th Jan '20

Yes that is true but the population is still growing quite quickly in the Philippines, one reason why the birth rate was so high is because death rate was high also. Yes many do go to work abroad, most families have someone working abroad. The growth has slowed from 3.3% (1960) to 1.5% (now) but the population has already grown from about 30m in 1960 to around 110m now. Pakistan is also growing fast at 2% per year. Ethiopia is 2.57%. China and India are still growing and they account for 36% of the world population, although that is set to fall with the rise in Africa. There are very few countries where the population is falling, Japan is partly because of strict immigration rules. I'm sure the UK's population would have fallen if not for immigration. What I'm seeing is a fall in western countries, a rise in Asia but slowing and large rise in most of Africa.

Toyin

Paul, you have done no research on opti and it’s just all about your hatred for TW. Get more professional fella!

Wimbledonsprinter

I am a shareholder and I went to the AGM on Friday. I must admit I sold some shares yesterday afternoon and need to think about the rest of my holding.

Personally I think the dividend is sustainable if there is no further decline in the business. If you take yesterday's profit warning number of £10m pre-tax profit and therefore assume £8m of post-tax. Historically, cash conversion (excluding FY2019) has been good and so this is a reasonable proxy for cash. With the dividend at 26p - this implies £5.6m in dividend payments - so should be reasonably supported by free cash flow. In FY2020, you could argue cash should be strong as some of the excess inventory at Proxy should be unwound.

The balance sheet looks reasonably solid - although not as strong as it was before the Proxy acquisition.

The key question is what is the long term outlook for profits after the Peppa Pig/ Hasbro situation is resolved (not even management I think currently have a clear read on this) and given the seeming decline in the overall toy market. (This decline seems steeper in the UK - but management also mentioned a figure of 4% decline in the US market last year).

It is also worth mentioning there was some comments at the AGM (particularly from one institutional shareholder, I believe) against the size of the management bonuses and the composition of the board (5 execs and 3 non-execs and some of the non-execs had been in place for so long that they were not technically "independent"). Looking at the proxy votes, not released in the RNS but shown on the company's website, there were quite large votes against certain of the AGM items: for example, over 20% of total votes against the re-election of the Chair and the head of the remuneration committee. If I assume that all the directors voted (they hold 4.842m shares) and they all voted for re-election (probably a safe assumption) then by my calculations, the remaining shareholders were split only 52%/48% in favour of re-electing the Chairman.

BurglarBill

"There is some evidence"

While I agree it is difficult to prove whether OPTI's products produce weight loss or not, the company also claims that its products reduce blood pressure and cholesterol levels. These levels can be checked and subjected to medical trials, which the company says it has done and achieved successful results. I wouldn't be so quick to write off their products. Whether the public choose to spend their money on OPTI's cardiovascular products, as opposed to what they can obtain through public health provision remains to be seen.

Zoiberg

Toyin, while talking of professionalism, have you researched TW's track record?

Gromley

Toyin wrote :

Well, if you are wanting to champion objectivity, it would not be a bad idea to read what was actually written, before getting upset that your enthusiasm for a company is not shared.

Paul summed up his view nicely with :

If it can generate significant & rapidly rising revenues in future, then I would revise my opinion to being positive. For me though, hardly any shares of this type actually deliver what they promise. That's the reason that I tend to disregard the hype. If it had an amazing product that worked brilliantly, and was likely to take the world by storm, then I would be prepared to have a punt on it. But I don't see that at the moment with this company's products.

"hardly any shares of this type actually deliver what they promise." Indeed, at any time the market has many pre-profitability companies with a story. The significant majority of them make very poor investments. Yet pretty much all of them have a small group of supporters who have done "extensive research in to the prospects" and are convinced that the future is golden.

If I felt that I had the inside track on a "sure thing" that was yet unrecognised by the market, I might be generous enough to share my thoughts and knowledge with friends and acquaintances, I might even be prepared to share to a wider audience.

I would not however get upses and abusive if other did not agree with me, their opinions would have no bearing whatsoever on my ultimate result, so why should I care? But this exactly what happens time and again if people dare not buy into the fantastic story.

I suppose, that if I was simply looking to pump up a speculative bubble so that I could make a turn selling my shares to next greater fool, then perhaps it would upset me if no-one listened to the story.

I'm sure that cannot be the case though.

Gromley, simply pointing out ps hasn’t done any research, amongst other mistakes to say the microbiome is scientific waffle is just pathetic. If you want to make more of that, enjoy.

Yes.

GrahamF

If you want to understand world population growth look to the late great statistician Hans Rosling. There are many videos of his talks on this subject that you can find by Googling his name.

However, if you want to understand the macro trends affecting the market for toys then you’re going to have to balance a large number of different trends such as increasing disposable income in the developing world against those population demographics.

Not really a situation where there is a clear decisive macro trend to dominate and so not something I would use as part of the investment case myself.

peterg

Scientific waffle looks like a pretty good description!

That doesn't mean that with good marketing Optibiotix can't end up making money for its shareholders. But brands like Goop marking rubbish seem to be able to make money, so Optibiotix may do too.

so peter, you think the microbiome is scientific waffle as well. It just shows the level of intelligence on this board and the blinkered sheep mentality. Goodbye you ps worshippers lmao.

Toyin - many of us often point out things that we thing Paul may have missed or mistakes we think he has made - as Paul often says investing is a team sport and the observations of others can be very valuable. There is a great community spirit here, but thankfully (mostly) not an echo chamber.

Mostly though we tend to avoid unfounded emotive accusations or insults such as "it’s just all about your hatred for TW. [Tom Winnifrith for those who are wondering]" or "Get more professional fella!" or "just pathetic." . Such comments tend to cause offence and distracting arguments and add no value.

What we do tend to do is back up our views with substantive information or analysis.

I note that on the same subject ( OptiBiotix Health (LON:OPTI) ) you did just this nearly a year ago in this post . You provided a very impressive list of customer engagements and these must have borne some fruit with an impressive revenue growth of nearly 50%.

However 50% of not very much is still not very much; the price to sales ratio is still around 50x so there is clearly still a lot for OptiBiotix Health (LON:OPTI) to do.

If you really wanted to add any value here and perhaps encourage others to invest, then perhaps some update on those customer engagements and the likely revenue trajectory would be useful.

If you have something substantive to say - you will find a very keen audience here, so please don't be shy.

Welshborderer

Mulling over Character (LON:CCT) I drifted across to Simply Wallstreet and was impressed to note the longevity of the board and that they are considerably younger than me, however, their Average Age is showing as 65! Not sure that I could have contributed much insight to the toy purchasing interests of the parents of young children and far less to the children themselves at their age. While it is clear there will be research available to them and the board has many years of commercial experience it does seem slightly curious at least to not have youth represented at the senior levels.

Gromley, thank you for the invitation. My problem is PS has done very little research and it is my belief it is to do with TW. Also I do not want to influence anybody’s investment strategy, that is not my intention. All I ask is for levelled honest debate.

Ok just a couple of points to start.

Ps says revenues are £808k this is incorrect, revenues were over £1m

Sales of £808k

Other revs of £617k a lot of this was the sale of sbtx shares (which is being used for stocking the retail launches, H&B being the first, not for keeping the lights on) but overall revs not including the share sales were £1m+. On top of that you have debtors of £514k most of which could not be put in last year due to ifrs(I don’t know exactly how much, but let’s say £400k) which takes revs to circ £1.4m.

We can also see that of the 52 agreements signed up to Dec 19, 50 of these are developing with the exception of 2.

We also know that 12 agreements during this period have started to generate revenues for the first time, we also know that 7 agreements have generated increased revenues.

Now Opti is finally transitioning from an R&D company (irrespective of what ps says, marketing company, my arse) to a company building commercial revenues, this has taken longer than I anticipated, but shit happens.

So we have 19 agreements generating revenues and another 31 developing, but let’s say 1/3 don’t make it (SOH’s guesstimate) that leaves 20 other revenue streams going forward. (This does not include any further agreements that may be signed going forward). Different agreements at maturity generate different revenue, we have three bands.

Small £250,000 pa

Med £500,000 pa

Large £1,000,000+ pa

I fully believe we will do £3-4m revs this year and £7-10m next. After that who knows.

One last point, the products do work contrary to what ps thinks, 19 companies around the world agree with another 20-30 soon to join them.

And I haven’t included potential revenues on sweetbiotix which I believe will be our biggest earner.

Many thanks.

Gromley I have replied but it was taken down immediately. Luckily I wrote it in pages first so if it doesn’t go up I will try again

bryans1311

Perhaps a year ago on here, I remember a debate with someone who was a tad emotional about optiobiotix- I’m guessing it was you- I said I would try the product out, so bought a couple of pouches of “go figure” to help lose the belly. It wasn’t offensive tasting, but also wasn’t particularly tasty- consistency a bit weird. After a few days of unpleasant side effects (mostly for other people!) I really started to feel a bit cr@ppy, and had to stop take it. From my own experience, awful product. Limited scuttlebutt, but good luck with your investment.

19th Jan '20

Arguably a very large slice of the dietary supplements and health food segment depends on people purchasing more on hope than science. And any positive effects may be as much attributable to a placebo effect as to any change brought about by the product. At the same time, individual anecdotes, positive or negative, are interesting but not significant evidence.

So, the only thing that really matters here with regard to OptiBiotix Health (LON:OPTI) is whether it is acquiring customers/sales at a significant rate. I don’t find the evidence convincing for that.

I often disagree with Paul. Revolution Bars (LON:RBG) - wishful thinking of a turnaround or being acquired in my view. Sosandar (LON:SOS) very high risk bet on two fashion gurus with limited track record of building a clothing brand, which if successful to any significant extent will attract fierce copycat competition in my view. BigDish (LON:DISH) - ultra high risk start up with no sustainable competitive advantage reminiscent of the dotcom boom in my view. However, it is clear that Paul has also identified some great winners too over the years that more than make up for the blips. It would be hubris for me not to listen to his opinions both positive and negative on stocks. And when I disagree to do so politely.

To accuse Paul of being anti a stock just because it is one beloved by TW is unwarranted and smacks of a personal attack. So, I would hope that remark gets withdrawn. Yes there are many on here who are big fans of Paul but there is still plenty of space for those with an alternative analysis.

Also it does make me wonder whether the small number of thumbs down votes that Paul’s articles regularly receive are coming from a small group of TW acolytes with some kind of personal vendetta. How sad if that’s what they do.

Other than that, I relish hearing different points of view on stocks providing they are well reasoned and for the most part the Stocko board and the SCVR achieve that in my view.

Bring forward the reasoned arguments and one’s comments will be welcomed.

This comment is under review

21st Jan '20

Hi toyin,

It seems that there was a technical glitch with your post, but it's been back a couple of days.

Can I just pick up on a few points.

You say that Paul is wrong to say that revenues are only £808k.

Certainly there were £808k of sales and £617k of "other income", some of which; was sale of shares. The company does not tell us how much was from sale of shares (although those following closely could probably estimate), but they do not say anything about what else the other other income might be. How you can be so sure that it is things that could be classified as revenue?

You also then say that there are debtors that would be included in revenue were it not for IFRS15. Firstly IFRS15 is imho particularly contraversial , in effect it says that revenue can only be recognised when it is "earned" even if customers pay in advance.

Current revenues are not really that relevant with a story stock like this in any case surely.

Anyway, I do tend to agree with you that Paul hasn't done much research, but that's exactly the point. As I alluded to previous, stocks with characteristics like this as a rule make very poor investments, there are exceptions (and perhaps OptiBiotix Health (LON:OPTI) is one) but it is very hard for investors to tell as such an early stage which are the gems. It is perhaps even harder for those that have done lots of detailed research to discriminate between the winners and losers.

Many story stocks have such loyal followers and I can be pretty certain they are not all correct.

The large number of agreements is interesting and potentially promising, but you only have to look to companies such as Versarien (LON:VRS) who reported today and have multiple 'collaborations' to see how questionable such things can be. Again it is promising that some are starting to produce revenues, but still very early stage.

As to the oh yes it does oh no it doesn't nature of whether the products work or not. Early stage commercial agreements are not imho sufficient proof of the pudding, this wouldn't be the first miss on something like this.

Revenues of 3-4m this year and 7-10m that would be good and if the latter were achieved I might start to get more interested as there might be a more provable business case that I see there to be now. Of course anyone waiting that long runs the risk of missing out on a multi-bagger in the meantime, but with a current market cap of £44m it is hard for me to see that this could run away too far on the path towards achieving £10m pa revenues.

Of course I don't discount the view that this could be a fantastic investment, but for me personally and I guess for Paul - I cannot see the benefit in the round of singling out this particular story stock for detailed research over and above the many others on offer.

I'm sure we'll keep an eye on progress here (I know I will) and perhaps you'll get the chance to come back and say "I told you so" - only time will tell.

22nd Jan '20

Gromley, thank you for your reply. We all have different views on stocks and valuations, that’s what makes the market. My point about my initial comment was that ps hadn’t done sufficient research and as you alluded to in your second to last paragraph

”but for me personally and I guess for Paul - I cannot see the benefit in the round of singling out this particular story stock for detailed research over and above the many others on offer.” Now with this statement in mind, why did ps “single out” Opti to comment on, there was eight other shares to discuss that day? I will leave that one with you.

I would never come back and say I told you so, that attitude is not my style when you have been polite and intelligent in your conversation.

All the best.

Small Cap Value Report (Fri 17 Jan 2020) - CCT, GYM, OPTI, HFD, WRKS, MOSB, CLL, LAM, VRE

Character (LON:CCT)

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Paul Scott

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