Small Cap Value Report (Fri 22 Jan 2021) - TEG, LUCE, CALL, TET, CCT

22nd Jan '21 by Paul Scott

89 comments 11885 reads

Good morning, it’s Paul here with the SCVR for Friday.

Timing - today's report is now finished.

Agenda -

Backlog items to start with (written up last night)

Ten Entertainment (LON:TEG) - full year trading update

Luceco (LON:LUCE) - FY 12/2020 trading update - strong Q4

Cloudcall (LON:CALL) - FY 12/2020 trading update

Today's trading updates/results:

Treatt (LON:TET) - Materially ahead of expectations update, but looks very expensive now

Character (LON:CCT) - 4 month trading update to 31 Dec 2020. Looks good value to me

Sorry I didn't get round to covering Works Co Uk (LON:WRKS) - I'm tired out after a really busy week, and have a Doctors appointment this afternoon. See a brief comment on it from me in the comments section below. I don't think it's madly exciting, is the quick summary!

Same with Zytronic (LON:ZYT) and Mysale (LON:MYSL) - I had a quick look at both this morning, and can't see anything interesting at the moment in either.

Ten Entertainment (LON:TEG)

205p - mkt cap £140m

Full-Year Trading Update

Ten Entertainment Group plc ("TEG" or "the Group"), a leading UK based operator of 46 family entertainment centres, today announces a trading update for the 52 weeks to 27 December 2020.

"Strong growth potential, well positioned to take advantage of tailwinds on reopening"

Monthly revenues - the table below is very interesting, as it shows performance at the various covid stages in 2020. Key points;

It was doing well before covid struck, with strong +LFL performance
Full shutdown in April to July, so zero revenues (but support from furlough & business rates relief will have helped)
LFL sales negative, and a worsening trend from August to year end, due to social distancing restrictions (only able to operate at 50% capacity) and regional lockdowns, I suppose.

TFzxbTQuhGIrKjQptf-FK4WaBxoIGULCM0wfDQHLoLSyzL3NoVH3R_eO7dIdtbHCDbsaxcoh1NN-9IPMVQOsFjliq8pudZ-9ZsIbL-5KE3HILOs4ga-BIpZTzrzLiHyg9bpCMk6Q

Clearly that’s not encouraging information. I’m comparing this with some retailers, who saw a bounce-back of pent-up demand, and positive LFLs in the autumn. Not so here. Plus of course, a leisure business like this cannot move transactions online. The booking is done online, but it still is a physical experience to visit a bowling alley.

TEG’s sites were closed for 49% of the available…

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timarr

23rd Jan '21

Hi rmillaree

I don't think it's possible to be uniformly positive about this deal and I would be concerned if any shareholder was, as there are clear risks. If this goes well the IGG directors will be very well rewarded, if it doesn't then they'll still be handsomely remunerated. CEOs don't tend to be short in the animal spirits department and IGG's board don't have a huge amount of equity skin in this game so I'm not convinced their ambitions are aligned with shareholders'.

On the positive side the deal adds diversification in terms of market and services. They're buying an excellent company with real and growing earnings in the most important market in the world.

On the negative side we have a company in a market that's undervalued, an issue made worse by currency depreciation, buying one in a market that's frothy. IGG's management have a hurdle to overcome to start with.

Beyond that you have to consider the culture clashes - not just UK v US but regulated v unregulated. IGG is a heavily regulated business dominated by compliance rules. tastytrade is an unregulated, freewheeling entity. As anyone who's worked in the sector can confirm, these are not naturally synergistic businesses.

The idea that tastytrade can operate standalone from IGG and they can still benefit from the synergies is illusory. At some point, there will have to be integration and there will be strain across the businesses as IGG's rules start to be applied to tasty. If growth stalls then that will be exacerbated.

This can all be managed but, in general, most businesses attempting cross-border acquisitions outside their core businesses fail to generate shareholder value. And IGG are paying a full price.

Personally I wish the management had stuck to growing the business organically, as I'm happy to diversify the risk myself, but I understand the management's desire to diversify outside their core regulated markets. That said I rate the odds of success as no more than 40-60. But the upside is significantly greater than the downside so, weighting the probabilities, I'm willing to stick with it.

rmillaree

IG Group (LON:IGG)
thanks for adding your comments timarr
Beyond that you have to consider the culture clashes - not just UK v US but regulated v unregulated. IGG is a heavily regulated business dominated by compliance rules. tastytrade is an unregulated, freewheeling entity. As anyone who's worked in the sector can confirm, these are not naturally synergistic businesses.

Thanks for that - i did not know that. Slightly surprising fact considering US is normally shot hot at financial regulation and ensuring compiance. Unless your initials are EM its probably best not to mess with the SEC. I suspect this may not be too much of an issue as long as both entities are acting in the law their interests arent that unaligned - one just has to look at how the gambling has gone from complete free for all to fully regulated in US - so to see the future picture - it is that they simply need to be compliant with every country the deal with (customer located in) to avoid blacklisting or backdated fines - as an IGG owned entity now i would expect they should do fine in that regard - although one never knws what nasties may be under the bonnet. I suspect companies like Plus Markets may have dabbled in the darker side of regulation and they seem to have got away with it so is it really clear cut that regulated and unregulated are two completely different lines of thinking?

As for the rest of the stuff you say i am not 100% convinced i agree but we really don't know how this will pan out so i will simply wait to see how the mop flops - good management should though know how to align the two to make the whole better without destroying the best bits of either entity one would hope - but thats just hope.

abtan

Ig Group (LON:IGG)

Thanks Timarr

I clearly missed Note 21 (why would a privately held company leave $112m on it's balance sheet?), though I still don't understand what it has to do with Note 14.

Are you implying that the cash that has been mutually agreed to be left in the business will be $500k or close to it?

Cheers

Albertos

24th Jan '21

Boohoo (LON:BOO) ASOS (LON:ASC)

Bit non-small cap I'll admit, but reports from Sky coming out that ASOS (LON:ASC) is frount-runner to buy the Topshop brand for £250m.

I hold Boohoo (LON:BOO) and I would seriously not like them to get involved at that level.

Next has pulled out of the bidding.

(Reuters article on news feed for Boohoo - and presumably ASOS )

Hi abtan

No, but I'm suggesting that the capital needed to run tasty is on the low side. That's a good thing in general, of course. I suspect the bulk of the $112 million will go to the shareholders though. I really like the look of tasty as a business, but when I read this type of thing I shudder:

Common entrepreneurial ethos combined with a culture of regulatory compliance and client-centric focus.

I always like to compare the management board pages when we have one of these slightly off-the-wall mergers.

Here's IG Group's: https://www.iggroup.com/about-...

Here's tasty's: https://www.tastytrade.com/abo...

Lots of interesting content on tastytrade: https://www.tastytrade.com/sho...

"Learning about markets, trading and taking risk has so many benefits it’s highly likely that the next generation of superstar entrepreneurs just made their first stock trade on Robinhood or lost money on their first speculative option trade. Who the f*** cares? I made money on my first option trade and then lost all my money, all $2000, on my next ten trades. Nobody thought Drexel Burnham was being careless nor did they care they were charging me $25 per contract in commissions. In fact, every amazing talent in the world of finance today, probably started out the same way. Experimenting."

This is going to be interesting.

lestat101

Hi Gromley,

Pretty much my assumptions. Don’t forget they would do considerably more online in the much busier H2 so online sales could be higher than we think, 30-40m. Surely a 20m m/cap is too small for a retailer with such a fast growing online offering?

IG Group (LON:IGG)
There is probably some presumptions on my part but culturally i see America and UK as completlyl different. From what i have seen americans seem to take pride in not blaming others for their decisions that go wrong and the UK seems to take the viewpoint that sometimes people do need to be protected from themselves and also certain organisations that may be perceived to target the vulnerable. I can't argue with anyone who says that says bods in the UK like to shift blame at the earliest opportunity :)

I don't think there is any problem here we just need to understand the differences - the IG board would be damn stupid to go in and try and change things too much (if at all!!) culturally in the US - and i would be gobsmacked if they don't know the exact score on this point. All i see IG board's job to do is be conservative guardians of the new business - learn from each other and and advance all sales opportunities and be as efficient as possible.

The differences of the two board pages linked are very stark - but the IG board does seem to have decent international experience and it looks like the CFO is a yank himself.

Interesting times ahead. Watch this space.

Ref vaccine effectiveness.
I have been waiting keenly for the data to start coming through from Israel now that they have vaccinated a mateial amount of their older population. I wouldn't exactly say that good news has been quick coming - but at last the data is starting to show material declines in infectection for over 60's. I think perhaps at present the market overall may be presuming that the vaccince will be a magic bullet - so i suspect if the vaccince does fall short so that if for example materially over 10% of oldies still have problems after having two shots the market may not take this well?

The linked data shows a 60% drop in infections from a very early sample - so certainly trending very much in the right direction - albeit 60% drop still leaves 40% of the whole. Hopefully longer term the decrease rate will continue to increase.
https://www.dailymail.co.uk/news/article-9179677/Israeli-healthcare-group-says-coronavirus-infections-plunged-vaccinated-60s.html
Overall moderately positive news with much more data presamably on the way soon.

There is probably some presumptions on my part but culturally i see America and UK as completlyl different.

Oh yes. I've worked for UK divisions of US companies and for a UK company running a US division. Chalk and cheese. We typically make the mistake of thinking Yanks are Brits with a funny accent but they're not. Americans are ultra competitive and very entrepreneurial, although they can also be insane rule followers, especially in the rank and file workforce.

Managements are typically very highly motivated by financial rewards to the point where staff are often treated like any other resources - the fire at will culture is central to the way they work. Job security is very low, but because of that companies are willing to make risky hires, so the employment market is very flexible. Good for the economy but arguably less so for individuals.

The general environment in the US is that you're free to do anything that's not prohibited but if you get it wrong you'll get sued. In the UK and Europe it's more preventitve, stopping things going wrong in the first place. Regulation here is along the same lines, in the US it's more light touch - although I gather even across the Pond it's been seriously tightened since I was last involved, pre 2008 crash.

I have been waiting keenly for the data to start coming through from Israel now that they have vaccinated a mateial amount of their older population

The signs are positive but to put it in context let's include the rider to their report:

Our opinion is that at this level of efficacy, there should be no exemption from performing Corona tests, isolation, or the enablement of crowded gatherings, until additional convincing data is obtained. And, of course continue to wear masks and keep social distancing, as recommended.

And here are the thoughts from the Israeli health minister this morning:

"We’re just in the beginning of the campaign, we unfortunately do see cases that after getting the first dose, people do get sick, get the coronavirus. At the same time there are some encouraging signs of less severe diseases, less people hospitalised after the first dose. At this stage its very difficult to say, its not a clinical trial yet ... We sincerely hope we will have better information soon ...

Vaccination is not a panacea ... Corona is still with us and we’ll have to live with this reality for a long time."

We can say, with reasonable confidence, that the vaccines are making a difference. It's an important step - but just a first one. Even if the vaccine efficacy is not as good as hoped for it will help to drive down R0 and infection rates. It's a step on the road to normality, at least.

EDIT: and the data coming out of Israel for the Pfizer vaccine suggests no effect on immunity for 14 days after the first jab and then a 33% improvement. The hope is that that will continue to improve, but we have no actual data. Israel is following the Pfizer recommendation of a second jab after three weeks.

Gromley

I'm not really convinced how fast Works co uk (LON:WRKS) online business really is 'growing' up 100% YoY yes, but how much of that is sustainable growth and how much (possibly temporary) dislocation from their high street offering?

They describe this as 3-5 years worth of growth, so unless it is a catalyst to a change of pace in growth then it is probably not as exciting as it looks.

They say their online growth was about 70% for the 11 weeks to 10th January (again including periods of lockdown). Overall during that period they were down 25% although up 24% when stores were open.

It's too inconclusive for me, so I'll sit and watch.

This is important data to continue to monitor - as it does on face value perhaps suggest we could be having some problems in the UK if we continue our current policy of delaying second jab - hopefully if evidence continues that stats for first jab are that bad then we will quickly change our policy if needs be. I am reasonably confident we are monitoring this closely and and decision made will be done on scientific needs and quickly - its very hard though if it literally is a 50/50% decision numbers wise if you are weighing up those that die due to not having had second jab v thjose that die due to having had first jab and not second jab - either way one of the two 50/50 groups is being given first dibs.

On a more positive note the same article (daily mail being reasonably balanced for once perhaps??) said the following.

It was reported yesterday that a single shot of the Pfizer vaccine had led to a 'major presence' of antibodies in 91 per cent of doctors and nurses who received it in Israel within 21 days.

So hopefully the 33% stat is one that really is being quoted out of context (tooearly) by some as its known that we should probably only start counting any numbers from day 22 onwards if we have to wait 3 weeks full weeks generally speaking before waiting time is over. I also doubt its as simple as "it always taking 14 days to start working ??" then working after that - would be intesting to see how big the variability is in getting up to the high levels of antibodies being in the body. I guess even then the fact we can measure them early does it mean they are in sufficient numbers where they need to be to do their job at that time. We will hopefully have a treasure trove of stats coming our way in the next 4-6 weeks - i am semi hopeful our route taken in the UK will not turn out to be completely the wrong one - i however i do want the most vulnerable to get their seconds jabs asap though as soon as we are at the point where the "equally vulnerable on lfl basis not vaccinated" have had their jabs to get them in an equivalent position.

Works co uk (LON:WRKS)
Thanks for keeping tis conversation going peeps. i have just had a look and the market cap of this one at only £22 mill compared to potentially £200 mill sales does seem to suggest there could potentially be very good upside here.

Initial question if you don't mind - have they come through covid without diluting shareholders and do you think they have enough cash to see see them through to the end of covid without dilution? probably an impossible question to answer perhaps but worth askling nontheless.

Well, most vaccines take a little while to start generating immunity and most get "better" as time goes on. So I don't think the 33% is out of context, nor is it particularly surprising, nor is it particularly alarming. Hopefully, the effect will continue to strengthen beyond 14 days.

The 14 day trigger point looks like it's real - the data suggests that there's no difference between vaccinated and unvaccinated groups until day 14. This is raw data and not a clinical trial but the UK scientist are looking at it carefully.

Because Israel is following the 2-jab Pfizer recommendation then we won't get any further data about the UK strategy after 21 days, we'll be conducting our own mass trial and keeping our fingers crossed. But the Israeli data will show if the 2-jab strategy really does provide high levels of protection at a population level, which is obviously important for everyone going forward.

The 12 week gap in the UK is a calculated gamble based on how other vaccines work and the desperate need to bring the death and hospitalisation rates down. I think the best way of viewing it is to hope that it will protect a lot of people but assume it won't cover all of them or as fully as the two jabs would. So as a vaccinated individual I wouldn't change my behaviour because I wouldn't know if I was safe - but overall we can still hope to see death and hospitalisation rates in the vaccinated cohort fall over the next two months.

I think the Israeli data is very positive, but also far from conclusive.

Yes, with Government help and cost cutting Works co uk (LON:WRKS) cash and liquidity seems to have actually improved over the period, they also say they think the business will exit stronger than before.

I agree that P:S looks very interesting, but not convinced about the other metrics at this point.

Works co uk (LON:WRKS)
Yes, with Government help and cost cutting Works co uk (LON:WRKS) cash and liquidity seems to have actually improved over the period, they also say they think the business will exit stronger than before.

Cheers tThats good to know - i guess the market is simply slightly skeptical this business will either be able to get back to decent annual profits - lets call that satrting at something apporaching £3-4 mill per year. Or perhaps that cash will be consumed with working capital. Or a mixture of the two.

Roll on next month when i don't have to think about tax returns and will have more time to my proper DYOR.

Trident

It's interesting isn't it that female execs are said to be more cautious. Yet not long into the hot seat Ig Group (LON:IGG) has made a significant acquisition which does not immediately look accretive.

Hewlett Packard's female CEO exec made a disastrous acquisition of Autonomy.

The new exec at John Lewis has a difficult task ahead, and we will see what will happen there.

Worth remembering Dean Hoyle ( ex card factory) is a major shareholder here. He’s ruthless and doesn’t do failure. I think he could take this private.

Private for a pittance or pay a reasonable takeover premium ? - i guess the word ruthless may answer that one ?

I donb't really know the background or anything about Dean Hoyle - but was he part of the team that brought this to market in 2018?

Out of interest I just looked this up and to answer my own question - Yes Dean Hoyle was part of the team that brought theworks to market in 2018 (@ I believe £1.80 per share). Having made a big investment and becoming chair in 2015.

Wikipedia article

If you want to bet on the view that he "doesn't do failure" you would I think have to decide what means in this context and in particular whether "failure" would be measured in terms of his personal bank balance or in terms of his reputation.

Floating a company at 170p / share and then buying it back for 40p (allowing a 100% premium) would be a success for his bank balance, but perhaps not for his reputation.

As I say I know nothing about the man, but even if I thought he was the best thing sliced bread, I would want to understand if his interests are aligned with other shareholders.

Small Cap Value Report (Fri 22 Jan 2021) - TEG, LUCE, CALL, TET, CCT

Ten Entertainment (LON:TEG)

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Paul Scott

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