Small Cap Value Report (Fri 24 Jan 2020) - Trade alert, OTMP, SONG, REC, GTC, SMRT
Morning!
My initial impression is that the RNS feed is light today (quite normal for Fridays). There are updates from Onthemarket (LON:OTMP) and Hipgnosis Songs Fund (LON:SONG).
List for today (will evolve):
- Onthemarket (LON:OTMP)
- Hipgnosis Songs Fund (LON:SONG)
- Record (LON:REC)
- Getech (LON:GTC)
- Smartspace Software (LON:SMRT)
As per usual, I am happy to take requests and circle back to stories missed earlier in the week, on quiet days like this.
Timings: I'll be here until around 4pm. Finished at 6pm.
Trade alert
I've sold all of my shares in PCF (LON:PCF), again to fund the house purchase.
My top five portfolio holdings now add up to 63% of total portfolio value.
This is quite high, I guess. But when you look at it from the point of view of my entire financial situation, I don't think I've become any riskier. All the shares I've sold are being converted into a lower-risk asset (home equity).
In fact, when you think about it that way, I am now taking less risk on a total basis, even if my shares portfolio is becoming very concentrated.
This is something I learned when I was taking financial exams: portfolio analysis for an individual needs to take all of their assets into account: home equity/mortgage, business assets, investment portfolio, etc.
And this is one of the reasons why giving financial advice is so difficult, and can't be done on a cookie-cutter basis. Shares and funds which make sense for one person might not make any sense for another person, depending on their individual circumstances, and their ability and willingness to take risk.
For the record, my current top five holdings and their percentage weights are:
- Volvere (LON:VLE) (18%)
- Burberry (LON:BRBY) (14%)
- H & T (LON:HAT) (12%)
- Berkshire Hathaway ($BRK.B) (11%)
- IG Group (LON:IGG) (9%)
The shares which I sold out of are:
- Creightons (LON:CRL)
- PCF (LON:PCF)
- B.P. Marsh & Partners (LON:BPM)
- Goco (LON:GOCO)
Please note that if it wasn't for the house purchase, I would still own all of these shares!
I was thinking this morning that when someone is lucky enough to have a very secure personal situation (a low mortgage, or no mortgage, and more income than outgoings) then they should be able to take a lot more risk in their equity portfolios. Because for them, what is the worst that can happen?
If their equity investments go bad, they still have a roof over their head, and their lifestyle shouldn't change too much. I guess there are a few assumptions involved here (e.g. that they didn't borrow to invest, and that their retirement plans are in place).
Onthemarket (LON:OTMP)
- Share price: 76p (+6%)
- No. of shares: 70 million
- Market cap: £53 million
Bellway to list residential properties with OTM
This reminds me of the deal announced with Persimmon, which we discussed in this report back in November.
Now we have a deal with Bellway:
We are delighted that Bellway has decided to join us as we start the new year while we continue to broaden our property advertiser base and widen our appeal to active property-seekers.
And a comment from Bellway themselves:
We like the clear and simple way in which OnTheMarket displays its properties and have watched it make real headway as a leading portal over the last two years.
We are always looking for new ways to market our properties and finding new audiences who are serious about buying their next home. We look forward to entering this partnership with OnTheMarket and being part of its continued growth.
It's clear that these deals aren't exclusive. You can find Persimmon and Bellway homes on Rightmove (LON:RMV) (in which I have a long position).
It does mean that OTMP is increasing its total catalogue and becoming a more complete property portal. Not having the likes of Persimmon and Bellway on board was a glaring weakness, for a company trying to offer all-of-market coverage.
I need to put my hands up and say that I'm biased against OTMP, for a number of reasons:
- I have an aversion to speculative, unprofitable companies (OTMP is rated as a Sucker Stock by Stockopedia's algorithms).
- I've been writing negatively about it for a while, so it might be difficult for me to change my mind on it.
- I've been invested in Rightmove for a while, and done well with it. It would be convenient for me if Rightmove continued to control the industry.
OTMP is forecast to break even this year, and possibly turn in a meaningful profit next year (the financial year ending January 2022).
If the stars align for it, and estate agents back it with everything they've got, I can maybe see it stealing a noticeable amount of market share. But many consumers are entrenched in their habit of browsing Rightmove, and this is a sector where network effects are strong. Rightmove's well-invested user interface and functionality are clearly ahead of their competitors, in my view. Consider the excellent "Where can I live?" feature, for example.
What I think is more likely is that Rightmove and Zoopla could stop hiking their prices so aggressively, if they start to feel a competitive pressure from OTMP.
Rightmove's average revenue per advertiser has recently been growing at a rate of 10% p.a., indicating to me that it still enjoys lots of pricing power, despite the arrival of OTMP.
The way I see it, the worst-case scenario is that Rightmove allows its ARPA to flatline for a while, until the threat of OTMP goes away. In that scenario, Rightmove's shares would almost certainly fall from their current multiple of 30x, but the company's competitive position would be assured.
Having said that, I don't yet believe that the threat posed by OTMP is very serious. Rightmove will release its 2019 earnings next month, and I expect a small loss of market share and a modest reduction in the rate of growth of ARPA. Nothing to get too concerned about, I hope!
Hipgnosis Songs Fund (LON:SONG)
- Share price: 109.55p (+0.5%)
- No. of shares: 620.6 million
- Market cap: £680 million
Acquisition of Music Catalogue
As noted in the comments, there is no shortage of announcements from SONG about their acquisitions.
Let's just quickly get you up to date on this one.
SONG has acquired a music catalogue from Brian Higgins, collaborator with Cher and Girls Aloud. SONG will get his writer share in relation to 362 songs.
The most valuable songs are probably "Believe" by Cher and three #1 hits by Girls Aloud.
Higgins co-wrote Believe and "co-wrote or produced" the Girls Aloud songs.
His share might be quite small, depending on how many other writers were responsible for each song and what percentage of the writer share he is therefore entitled to.
For example, this background is from the Wikipedia entry for Believe:
A demo of "Believe", written by Brian Higgins, Matthew Gray, Stuart McLennen and Timothy Powell, circulated at Warner for months. Producer Mark Taylor said "everyone loved the chorus but not the rest of the song". Warner chairman Rob Dickins asked the production house Dreamhouse to work on the song. Taylor said their goal was to make a Cher dance record without alienating her fans.[4] According to Taylor, "Two of our writers, Steve Torch and Paul Barry, got involved and eventually came up with a complete song that Rob and Cher were happy with."
I count six writers, not including Cher herself who says that she wrote a few of the lyrics.
Therefore, far from buying Believe, it's more reasonable to say that SONG has bought a fractional piece of its writer share - perhaps a small piece.
As usual, the financial details aren't given in terms of the price paid for the catalogue and the expected yield.
My view - the most attractive feature of SONG is its lack of correlation with other companies and with the UK economy. Royalty income from songs with international appeal shouldn't change too much, whatever the UK economy might do.
NAV was 108.46p as of September 2019. If SONG aren't overpaying for the catalogues, then the returns from buying these shares around NAV should be ok!
Record (LON:REC)
- Share price: 40.51p (+3%)
- No. of shares: 199 million
- Market cap: £81 million
Q3 Trading update (published last week)
I exited this in December, so I currently have no position in it.
It's a specialist currency manager, and a StockRank favourite - current rating is 99/100.
You can read my analysis of its recent interim results here.
Q3 update
Last week's update included a very pleasant surprise: performance fees of £1.8 million were earned in the quarter.
Record has allowed its basic management fees to decline, hoping to prove the value of its work to clients by putting greater emphasis on these bonuses.
In H1, no performance fees were earned at all - very depressing! As a consequence, pre-tax profit fell by 20% (despite growth in AUM).
Q3 was much better: more net inflows than the entire H1 period, and the positive performance fee.
Against that, the company continues to warn about competitive pressures on basic fee rates:
"Management fee rates held up in spite of continued competition and fee pressure. Our focus remains on building on current business opportunities and on enhancement and innovation of our products and services."
This is the core reason I am out of the stock - I think that maintaining an edge in forex is very difficult. Neil Record produced extremely clever economic analysis of the currency markets, and created a successful business, but I don't know for how much longer it will remain competitive.
The secular decline in basic fee rates, and the plain-speaking warnings from management, indicate that the competitive edge will be difficult to maintain for the foreseeable future.
Performance fees will help to take up the slack, but are impossible for outsiders to predict. So they deserve a lower valuation than the guaranteed income from management fees.
More positively, there is no doubt that the company has made decent long-term progress in both client numbers and AUM (since 2014, client numbers have increased from 48 to 73, and AUM has increased from $51 billion to $64.7 billion).
The problem is that profit growth hasn't kept up with growth in client numbers and AUME - again, because of pricing pressures.
Record does have a great tendency to reward shareholders with dividends (and the occasional buyback), and Neil Record remains vigilant as Chairman with a 31% shareholding - it's unlikely that he will allow anything very stupid to happen, when he has a stake worth £25 million in a company which he lovingly built and put his name to.
So there are positives and negatives to take away, as always. I think the company will do ok, even if I don't have the conviction to keep holding it personally.
Getech (LON:GTC)
- Share price: 22p (-14%)
- No. of shares: 37.6 million
- Market cap: £8 million
Financial update: 12 months to 31 December 2019
It's been ages since I looked at this one. It provides geological products and services. There is a correlation with the oil price, for obvious reasons!
This update starts off brilliantly:
Against what remains a volatile macroeconomic and commercial backdrop for oil and gas exploration spending, Getech increased its new forward sales by 41%, expanded its orderbook by 48% and the Group's cash balance closed the year at c£3.6 million (31 December 2018: £1.4 million).
It goes on to say that it is creating more recurring revenue, improving visibility and reducing the lumpiness of the business - lovely.
But it hasn't been achieved yet, and certain lumpy transactions still need to be sorted out. They've been delayed, and so we get a sales miss and profit warning:
The fact that they did not complete in 2019... is expected to result in a c £2 million year-on-year fall in revenue.
Thanks to reduced costs, the company still expects positive EBITDA of £0.6 million - £0.8 million (last year: £1.1 million).
The statutory result will probably be very bad - there is £3.1 million in goodwill which is set to be partially impaired.
CEO comment
Alongside the growth delivered in 2018, this highlights how Getech's earnings remain exposed to lumpy transactions, the exact timings of which can be difficult to influence. We are however strategically driving significant growth in our orderbook to progressively lessen this exposure. We also work to protect Getech and its profitability from year-end risk through careful capital management.
We have begun 2020 with a full and diverse sales pipeline, this benefiting from 2019 sales campaigns in new regions, with new potential customers. Our focus is to realise the value of this pipeline and in January 2020 we have already added a new supermajor Globe customer....
My view
The long-term track record here is ok. The company paid dividends until 2015, when it made a £4.3 million acquisition (of which £3.1 million is the goodwill that is now up for impairment).
Aside from that acquisition, which apparently hasn't worked out, the track record is not bad. Stocko gives it a Quality Rank of 60.
And I like the strategic direction, of trying to figure out a way to earn more recurring revenue.
Someone who can familiarise themselves with Getech's products and services might have the level of comfort needed to invest here.
Smartspace Software (LON:SMRT)
- Share price: 32.5p (was 44.5p before the trading statement)
- No. of shares: 22 milion
- Market cap: £7 million
Trading statement (Thursday)
This company makes the products which enable "smart" offices.
My reponse to this update: Ouch.
While the Company has made good progress and is in advanced stage contract negotiations, the [Enterprise business] has been informed that one of its key hardware suppliers will not be able to fulfil its contractual obligation in respect of timely delivery of product. Although the supplier is seeking to fulfil the order as soon as possible, the Company has been informed that delivery will not take place in FY20.
As a result of this delay, the Company has been unable to conclude negotiations, and consequentially recognise revenue, on a number of material enterprise prospects due to impact in the current financial year. As a result, the Group therefore now expects to report revenues at a similar level to FY19, with an equivalent impact of this revenue shortfall on EBITDA.
This is another company which is trying to get more recurring, SaaS-type revenue from smaller customers, instead of large lumpy contracts.
I'm open to the possibility that this share price collapse could represent a chance to buy into a company with a big future in an important niche. Anecdotally, I've been shocked at how many of my friends are now working in "flexible offices" at large companies. Regular employees now have to book their desks in advance - I'm glad I started working for myself before that became a thing!
On Research Tree, I've downloaded the latest note published by N+1 Singer (this note has been mentioned by readers in the comments - cheers!). Please note that Singer is SMRT's Nomad & Broker.
Singer says that the purchase of SwipedOn was "a gem of an acquisition". It was bought for £5.4 million last year.
Applying the "Rule of 40", it thinks that SwipedOn could be worth 10x its revenues "in the current market". If that's true, it would mean that SMRT is very heavily undervalued.
Of course, "the current market" is a bit frothy, especially when it comes to anything that can be tied to the Internet of Things - and SMRT falls into this category.
The company reports £3.2 million of cash at the end of December 2019, and is forecast to make an adjusted pre-tax loss of £1.6 million in the financial year ending January 2021.
If that translates to a reduction in cash, and if profitability doesn't appear soon, I wonder if SMRT might need a cash injection at some point?
This could be worth looking into, though it does appear to be at the more speculative end of the spectrum.
Ok, that's it from me. Paul will be with you next week. Have a good weekend!
Graham
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51 comments
If you look at the like of Hobbs and Phase Eight shops, which seemed to me to address the target market for Sosandar (LON:SOS), these ran into retail woes and were acquired by The Foshcini Group (TFG), which is I understand is a private South African owned company. They have been quite successful at turning these around.
If you look at the latest filed accounts for Hobbs, they turnover circa £300m and in a return to profit seem to have made around £3-5m Net Profit in their financial year. So that alone represents a market target to aim for, I guess, but means a hell of a lot of work to penetrate.
It maybe that Sosandar (LON:SOS) is materially underpowered in its marketing budget and reach, and is better placed to have a decent sized investor rather than perhaps in the future constantly going to market for cash raise to break another turnover threshold.
That I suspect will be the dilemma of strategy for the management.
For those interested in Hipgnosis Songs Fund (LON:SONG) and still keeping track of this thread, here's a short piece that should be of interest:- https://www.midiaresearch.com/blog/why-the-song-economy-is-just-getting-started/
Sosandar (LON:SOS)
Owning SOS is like owning an option. Either they will do very well, or fade.
Simplistically, I see their business model is to copy Boohoo, but for older women. Although underlying, I suspect it's more complicated.
The trap for them is to behave like an old-school direct mail firm, where they spend £xxx acquiring new customers with £yyy lifetime value. Yes, the maths can work, but this seems more the finance company approach building a lending book which throws off cash over time, after expensing upfront marketing costs.
Personally, I think Boohoo worked with something new, i.e. funky, cheap fast fashion. Young person buys an item, wears it out with friends, friends say 'cool - where did you get that from?' - thus six new customers to the site.
Boohoo does have that bling bling fast fashion feel about it as did their adverts in central London during their early days. I recall their ads created a bit of buzz as a new cool site to buy trendy gear, dirt cheap. Forget saving up all year for a brand name item, goto this site. This was the cut-through that got young people excited. A bit like what Zara did in it's day for casual clothing.
Whereas the Sosander website is more staid looking. This makes sense given Sosander's target audience. However, is it sufficiently differentiated on the product side to generate that elusive referral buzz? The founders' view was the existing options (M&S etc) are too frumpy and they want to capture women as they transition from fast fashion to more sensible, but not boring clothing.
If you compare boohoo.com with sosander.com the former leads with trendy items at £6 £8 £10 ... £14 price points and Sosander with £39 £49 £69 .. £99
From the SOS trading update "Given the upfront cost of acquiring new customers against the benefit over the lifetime of the customer, the Company expects this investment to result in the net loss for the full year being higher than previously anticipated with the increased benefit to be experienced in future years."
"Acquisition of customers is nothing without successful retention and that's why it is so pleasing to see that repeat customers in January, a traditionally difficult trading period, are tracking higher than in the peak Autumn/Winter period helping to continually improve the ever-growing lifetime revenue number."
So the narrative is expensive to recruit but sticky revenues from there. Yes the maths can work, but it may be a grind. Perhaps it's just a matter of language used, but I would prefer if they hit a novel product-price point to get the buzz going and scale from there.
I hold a small position, more as an options trade.
If you compare boohoo.com with sosander.com the former leads with trendy items at £6 £8 £10 ... £14 price points and Sosander with £39 £49 £69 .. £99
I think a better comparison would be with Karen Millen and Coast, both now fully under Boohoo management.
The issue for me with Sosandar (LON:SOS) is the nuts and bolts detail management of running an online clothing business. The clothes seem OK - but that's what you'd expect with their background. They are acquiring customers; I don't think there's enough evidence to say whether the cost will prove profitable in the long run. Many commentators believe that Coast and KM are risky departures from Boohoo's normal business - true, to an extent, but they have much more relevant experience than Sosandar's management. Sosandar have proved themselves in the market, albeit in a limited way; the new Coast and KM still have to do that, though they will retain the aura of their previous incarnations.
It will be interesting to watch how they both go. I hold Boohoo (LON:BOO) and merely observe Sosandar (LON:SOS) .
"I think a better comparison would be with Karen Millen and Coast, both now fully under Boohoo management."
Looking at their web sites I see they have migrated to the Boo platform, not the URL but their web sites have the same layouts, icons etc. Must be using the same engine.
Given Boo has a good engine looks like they can just bolt other bands onto it to move into adjacent markets.
SOS will do ok if they hit a nerve in the market with their branding and designs. They need the repeat orders and customer recommendations to make it work. If they just seek to compete on a marketing and fulfillment engine basis, then it's hard going.
Suspect the fashion market will bifurcate into the firms which are good at design, branding and customer engagement and the platforms like Shopify, Amazon etc which provide fulfilment leverage.
Sosandar (LON:SOS)
On a revenue trajectory it can easily hold down a 5-10x multiple of revenue if you look solely at historic comparisons (note, this is a very biased valuation exercise as we only tend to look and recall the successful trajectories).
In a tech-emergence-war sort of situation where a company is staking out sort of virgin territory then spending a lot to win the initial ground is rational and optimal (although may still fail). This is how good VCs back early stage businesses and they ask them to push as hard and messy as they can and take as much ground as they can without worrying about profit or may other niceties (say inc regulation). Its a sensible model but perhaps is now being a bit overplayed and not selective enough due to the success of some big tech cos. For example, it most dumbly applied in the grimtech space (sorry I meant fintech).
Sosandar aint that sort of beast. Yes the pay to get customer list...but their customers aren't going to be as loyally locked in as say my dependence on Spotify for tunes or twitter for speaking absolute nonsense (well, not always...but twitter is where we go to bullshit and spitball).
Nearer to home ASOS (LON:ASC) is more tech disrupter in that it provided a new dominant-ish tech platform whereas Boohoo (LON:BOO) is really the out and out retailing success. Sosandar are definitely going for the latter but are listed at a much earlier stage than Boo ever was. It also not clear to me that Sosandar have the freshness and stand out of what Boo brought...I'm a middle aged man so what do I know (I do like a funky shirt!) but girls, young women and buyer mums I know really attached to Boo. In many respects Boo creates its own demand with its cheap and cheerful quick model....so there's a little bit of platform magic creeping in there.
Sosandar is interesting but its not got the same magic which makes the growth path much more hazardous and perhaps more expensive.
In addition, I think the co-CEOs should focus on product and promotion and get an experienced CEO in. The step off growth last year and an attempt to go more self-financing but modest growth was hubristic...over believing their own hype rather than cold sober look at how these journeys usually go. That mistake will always now hurt the business until profitability....and stepping off looking for new customers aggressively just as you could breakeven at say £30m revenue doesn't support current valuation or hoped for price trajectory....current price is only justified if you believe they are going to keep smashing it all the way up through c. £100m and more mark.
I'm watching from a distance with interest. I believe that I will get the chance to buy at a price not much more than today (maybe less) when it trades at a market cap similar to annual revenue
re: Hipgnosis Songs Fund (LON:SONG)
Hi LumpedOn - appreciate the feedback! Some great points there. Best of luck with your position.
G
Graham, I took part in the recent Hipgnosis Songs Fund (LON:SONC) "C share" placing and look forward to the conversion of these into Hipgnosis Songs Fund (LON:SONG) in Feb. Totally agree that the announcements never include hard finanicals, but for me at least the stated fund dividend objective of 5% in (as you say) an uncorrelated sector derisks it a bit.
The real attraction for me is three-fold - firstly the growth, and forecasted growth in music streaming generally where records (sic) were being set over and over throughout 2019 - e.g. 17million plays of Wham's Last Christmas during Xmas week alone, secondly the ease of ability for Hipgnosis Songs Fund (LON:SONG) to collect their contributions however small (and not including Wham! of course) directly from the streaming companies like Spotify, and finally the people pulled in by the fund to guide the purchases of catalogues. Nile Rodgers for example may not be recognised a business leader but has a stellar track record in the music biz for talent and trend spotting.
In the old world of reliance on pubs / clubs / radio stations etc to settle performing rights then gathering up the pennies would have been a nightmare, but I am imagining an automated and transparent collection model in place between Hipgnosis Songs Fund (LON:SONG) and music streaming co's which, linked with a significant growth in all demographics consuming more music via smartphones etc, makes this an interesting ISA hold for a bit of cash generation and growth.
Not one for everyone, but IMOH it's a limited risk thematic that appeals.
Hi Paul,
If you have time, would you comment on NCC's results yesterday please?
Could you prodduce a view on Galliford Try following the sale of its housebuiding side
Sorry, the GFRD update was on 9 Jan - I have to prioritise more recent news. G
Unless you refinance or rent out the house it is just a liability. It takes away from the money you could be making by investing it in a revenue generating asset.
Is it though - you could look at it as though he's invested in a house that is generating a revenue (the saved rent) and with the historically proven bonus of a long term capital gain.
any chance you could look at Marston's or is it too mid cap? The market didn't like the results...
Richard
Onthemarket (LON:OTMP) share price has only decreased (give or take) by the amount of share issuance to customers (agents) for their services since IPO. There has actually been very little underlying selling.
That is why stockopedia hates it but I see this as a flaw with stockopedia because it is actually a competitive advantage to have the agents and housebuilders as shareholders.
It is now in their interest to see OTM thrive and it can charge anywhere between £400 and £700 ARPA and be really profitable which is far from Rightmove's charges.
I see OTM doing very well and Rightmove having plenty of downside risk.
Any thoughts on Finablr (LON:FIN) whose price has plummeted >20% today off the back of a 10am RNS which - if I'm honest - I don't really understand? Maybe some controversy over whether this info should have been disclosed in the IPO docs.
Good luck with the house purchase Graham.
Interesting to read your comments and exam specification of deeming the house as an asset. That is absolutely 100% correct of course but from an emotional point of view I never personally see it like that. For me it is our home and not an asset; that is it makes little difference to me if it goes up/down in market value since I've no plan on moving and I have to live somewhere. We are also in a fortunate position of having a nil balance mortgage, due to my earlier years of frugality and aggressive approach to clearing any debt (which I try to avoid where possible). Shares and other investments I certainly view as assets as at some point I may want to realise their value or derive an income from them.
As for the house, I hope never to move and it's value will only matter when it is reviewed in my estate after I've gone. However, if as statistically as is likely to happen, my wife outlives me then it becomes here asset/problem.
Unless you refinance or rent out the house it is just a liability. It takes away from the money you could be making by investing it in a revenue generating asset.
Actually living in the house is far more tax efficient
1 There is tax on rental income but no tax on the rent saved by living there.
2 Capital gains tax is levied on a rented property but not your principal residence.
Making 80% in rent that you wouldn't otherwise is far better than the 20% cost of tax that you save by not renting it and living in it.
If you have the rental property in a company you can deduct any expenses of buying, improving and selling the asset when working out capital gains. You then apply an indexation allowance, which reduces the gain by taking inflation into account.
That is all very well if the property is let although you should be aware that indexation allowance no longer applies. Wildshot was talking about his own house and you would not want that in a company!
I think you missed the original point which was that a personal house is an asset. It clearly isn't.
Only in an era of negative rates would people think an asset it something you own but pay in the future and incur interest on.....
Sounds a whole lot like a liability to me.
Thornabian
I think you missed the original point which was that a personal house is an asset. It clearly isn't.
Only in an era of negative rates would people think an asset it something you own but pay in the future and incur interest on.....
Sounds a whole lot like a liability to me.
Ok - what about calling the positive equity one has in ones house as an asset is that ok? . I am guessing most of the bods posting here have reasonable equity in their house. So it would seem strange to ignore this fact and for example and call a 500k valued house with a 20k mortgage a "liability".
I would say each to there own with their houses - some probably are just custodians to give to their kids for nowt or at a minimum live there for as long as they can for their personal enjoyment - and some see the house as great tool to having some sort of decent standard of living when they reach retirement age by cashing in the pot of gold (me). I see both opinions as being equally valid and making sense for their personal reasons.
Thornabian
If you have the rental property in a company you can deduct any expenses of buying, improving and selling the asset when working out capital gains. You then apply an indexation allowance, which reduces the gain by taking inflation into account.
You cannot claim indexation allowance now. That allowance ended 31/12/2017 - albeit relief inflation up to that point was not lost. Note if you own rental property via a company you also miss out in the very useful capital gains exemption which can potentially, for a couple give a nice £23,400 tax free profit on sale - nothing simple unfortunately whether its best to hold property via company or not as there certainly can be advantages to the company structure.
What do you think about Frenkel Topping (FEN)?
High earnings but sas been technically overbought for some time but a good RNS today.
Universe Share News (UNG) is another one.
Good morning Graham
I wonder whether you would consider going back to the update from Van Elle Holdings (LON:VANL) earlier this week. They had a poor start to their stock market life, but things are looking better now, and there is plenty of room for a share price recovery. I don't hold.
Graham
Agree it isn't just shareholdings that establish wealth, and a proper overview should consider all assets.
I suspect shareholdings and share dealings do take a greater share of ones intellectual/emotional assets, as I suspect investors are trying to prove something to themselves, as much as increasing their wealth via good returns.
Terry Smith says some of the best investors are dead, because that way they don't get sucked into all the mind games investing is prone to. Obviously that's a bit of a high price to pay, so generally I prefer my Stockopedia subscription to keep me on the straight and narrow.
Disappointing update from Getech (LON:GTC), which has been in turnaround mode for some time now. Revenue attributable to the year is down 25% year on year, although ebitda is still positive, just. Part of the game plan seems to be to move customers into longer term subscriptions, and the revenue miss is attributed to negotiations on this taking longer than expected. I approve of software businesses refusing to offer a big discount to get contracts booked before the year end, but they do seem to be in an uphill fight here. I hold.
I sold out of this in the morning (it was my smallest position) as frankly I don't see it going anywhere soon and with the market reasonably high I am using opportunities to cash out where it makes sense (whether on the positive or negative side.)
I don't have anything hugely against what management are trying to do but agree the length of time is worrying but I just can see my money being deployed at the right time somewhere better.
Hi SundayTrader, a piece on Getech (LON:GTC) has been added to the report. Thanks. G
Thank you Graham, re Getech (LON:GTC). As ever, your perspective is immensely helpful. Like others, I much appreciate yours and Paul's analysis - even if I don't always get round to saying so.
Ultra Electronics Holdings (LON:ULE) Capital Markets Day, given yesterday afternoon. This full length video, is rather long, covers the whole event. It gives a good insight into the new management, and what they've been up to, under the direction of Simon Pryce, CEO.
https://www.piworld.co.uk/2020/01/24/ultra-electronics-ule-capital-markets-day-january-2020/
Hats off to their transparency, and making this available to everyone.
Morning Graham, any thoughts on Northgate? A lot of trading and some big buys recently but shares have dived although the Stockopedia screen shows this share as bullish? What are the implications of 'This security is involved in a takeover situation'?
What's going on here?
Please excuse the newbie questions!
Rusty: In reply to your question, Northgate (LON:NTG) has agreed a merger with £REDD. It ws announced last November and approved by a shareholder meeting on January 15 (this is all in the News tab on Stocko - though you'll have to wade through many dozens of Form 8.3 announcements of holdings because of the rules once a marger/takeover has been announced).
The terms are given in this announcement:
Nov 29 - Struggling British company Northgate Plc NTG.L said on Friday
it would buy peer Redde REDD.L , in whatwould create one of Britain's
largest vehicle rental servicesfirm.
The merged company
Redde Northgate will be 54% owned byNorthgate shareholders and the
remaining 46% by Redde, thecompanies said, and each Redde shareholder
will get 0.3669 newNorthgate shares for each Redde share.
----------------
I guess that the share price fall reflects the market's view of the likely content of the Q3 trading update (due in early March).
Thanks FREng. I noted the following big buys on 3rd Jan .
10:26 - 03/01
Buy 75000 312.84p £234,633.00
11:06 - 03/01
Buy 15000 312.99p £46,948.50
11:45 - 03/01
Buy 14685 313.00p £45,964.05
So there's an expectation of money being made. But I'm currently at a loss.
Morning Graham.
As a holder I'll be interested to hear what you have to say about Hipgnosis Songs Fund (LON:SONG) .
Surely not much to take from today's RNS as they appear to be aquiring a catalogue almost every other day - or maybe you're a big fan of Cher or Girls Aloud (cleverly worded as I'm pretty sure they're no longer the UK's biggest selling girl group of the 21st century).
Never any mention of how much they're paying for these catalogues, what they think the payback time is based on historical earnings, what additional revenue they hope to generate from working the catalogues, what percentage of each song they're purchasing or whether they have purchased the catalogues for the full life of copyright or some shorter period of time.
Huge incentives here for the people behind the company to keep the share price moving so content to continue holding whilst waiting for some meaningful figures to come out.
At least I've heard of the artists in this RNS!
I emailed them and asked for a playlist a month or so ago which they very kindly did. It’s on Spotify and amazon as Hipgnosis.
Graham if you have time, could you have a look at the update from Smartspace Software (LON:SMRT) yesterday. It fell 30% and now has an EV less than what it paid for the Space Connect business in November of £3.2m. Thanks
The profit warning does leave the reader hanging a bit. States "Group cash at 31 December 2019 was £3.2 million." but at the last interim results EBITDA was 3.1m loss for the half year. Also there is the recent acquisition, is that a cash drain ?
Hard to tell if they will run out of cash, would have been good if they had updated their burn rate.
Product looks good. For companies moving to hot desking it's useful. Although MS exchange does a lot of this.
Smartspace Software (LON:SMRT) are an interesting one. There was a broker note out on Research Tree that says the value of SwipedOn (bought for £5.9m) might be worth 10 * revenues (£1.7m) in the current market by a PE house!! so £17m. Once again if you read my piece on Sosandar (LON:SOS) yesterday this is another good example of the prime valuation disconnect between loss making disruptive growth companies and UK listed markets.
The expected revenues for this year in the larger part of the business were deferred largely due to logistics, so this revenue appears to underpin next years forecasts.
Sum of the parts valuation for the 3 businesses plus cash certainly exceeds the current market cap by some distance.
Smartspace Software (LON:SMRT)
It is an interesting one!
From previous half year results cash burn was 3.85m so if that continues then perhaps they need another raise. Depends on the revenues from the enterprise deals and when they fix the hardware supply. I was a bit curious on the recent wording "The Company continues to have a strong pipeline of near-term enterprise opportunities, mainly from existing clients". Existing? Would have hoped for new at this early stage. But ok, if they can up-sell via cross sell.
As a finger in the air example, if they need another £8m to see them through to cash positive, that's a call of 40p per share. So as a potential shareholder, if I buy today at 33p I am mentally in for 73p.
Yes, UK AIM shareholders perhaps don't prefer loss making start ups. In comparison, if they were with a PE/VC firm, it may be easier raising additional cash from stakeholders when needed, but, a new round will likely force dilute the management team's holdings, as a condition. Whereas, with a listing, all shareholders need to participate or face dilution equally.
But yes, in the USA, tech startups get a better run.
David
With regard to Sosandar (LON:SOS) I think that it is worth remembering that it is not really a disruptive company. Their market is less well served than it might be but those people are not walking around naked so it is served already. Their business model, internet retailing of clothes, is just mimicking what many are already doing so there is nothing disruptive there. Their differentiation appears to be that their product aims to be a better product in its category for the target market (better fit, better style, more fashionable, etc). but it is not a new type of product. (Dresses, jeans, etc). So, it is not a disruptive product just a superior version of the same product.
So, it is big stretch to value it like a disruptive tech company.
In my view, there is no tech to back and no disruption to back either. What you are backing is the ability of the management to do the same thing as many other companies are already doing but just that they will do it better.
Whether they really can achieve that is very hard to tell. I find it interesting how many clothes retailers are struggling. It shows just how difficult it is to achieve even for those with more experience at running a clothes retailer than the Sosandar (LON:SOS) management.
Hi Graham,
I kinda agree and kinda disagree
The term disruptive innovation was originally coined by Prof Clayton M. Christensen at Harvard. In his seminal works "The innovators dilemma" and follow up "The innovators solution" he outlined two types of disruptive innovation, one he called a 'low-end' sustaining innovation, a category that Sosandar (LON:SOS) falls into. In short, it sustains the existing business model of the industry (profit per fashion item sold) but is able to compete at cheaper prices due to its business model (e-tailer) and through the use of technology.
You are right to point out that Sosandar (LON:SOS) has no real differentiator from other e-tailers (apart from its brand) but being an e-tailer enables it to compete very effectively against incumbent bricks and mortar retailers and as a result, disrupt their businesses. Whilst the likes of M&S flail around without a proper e-commerce fashion strategy, Sosandar can steal their customers. It is common for incumbent giants to either try and compete against lower cost insurgents or take them over but often they are too slow to act. In the meantime, Sosandar is building great insights into customer preferences which will generate incremental value over time so long as it stays abreast of changing fashions and keep its brand current. So there is value in its e-tail technology and the experiences they have had about customers.
have a great weekend
cheers
Francis
re: Smartspace Software (LON:SMRT)
I'll check it out and see if I have anything useful to add!
Cheers
My morning smallcap tweet: SQN anaerobic indigestion.
Norman Broadbent (LON:NBB) Getech (LON:GTC) Hansard Global (LON:HSD) SQN Asset Finance Income Fund (LON:SQN) Tekcapital (LON:TEK), Revolution Bars (LON:RBG), RTC (LON:RTC)
Norman Broadbent (NBB) FY trading: rev up 22% (H1 up 13%). Pretax £16k (-£265k). No F/C or guidance re mgmt expectations.
GETECH (GTC) warns FY rev only £6m (£8m). EBITDA £0.6-0.8m (£1.1m). Says negotiations on several substantial transactions overran. Working to reduce lumpiness of orders.
Hansard Global (HSD) Q2 new business up 7%, down from 10% in Q1. Co is "pleased to have built further upon our strong start to the financial year." If you say so.
SQN Asset Finance Income Fund (SQN) strategic review of the Company's operations as it deays NAV figure Anaerobic Digestion assets are revalued. Previously cited poor performance of these assets.
Tekcapital (TEK) wins 'major' food contract for to assist in the sale of Microsalt to snack food companies in the southwestern US. Burps up some old-hat MBAspeak "Our partnership is a win-win-win as we are offering their customers a unique, on-trend, innovative ingredient."
In line: Revolution Bars (LON:RBG) RTC (LON:RTC)
I believe it is Rbg Holdings (LON:RBGP) that is 'in line' this morning and not Revolution Bars (LON:RBG)
I heard Rbg Holdings (LON:RBGP) present at the last Mello and was impressed by the CEO and the way they plan to grow the business, including their cautious approach to litigation funding. Pleased to see the RNS out this morning has given them a bit of a boost. I hold.
Graham, I know you used to own Record (not sure if you still do). You commented on them back 22nd Nov. They reported 17 Jan and would be interested if you would be prepared to track back to hear your thoughts. They have had net inflows of 2.5b dollars, but 1bn is a temporary tactical inflow. Not looking for much just aware you look at this stock differently to me and it is always good to hear informed others views. Hope all is well.
Yes, today's a good day to look at them - will do. Thanks Camtab. G
Hi Cantab
I have a modest commitment ( primarily for the dividend yield) bought around the current price. I share Graham’s view that this is no growth stock. The chart suggests since recovering after the last earning hiatus the price will struggle to go above 40p and it is hard to see a catalyst to push it higher given how competitive it’s market remains. Yes I agree NR has plenty of skin in the game so that is a modest plus. If you have for the yield then plenty of reason to hold. I am looking to exit if the price goes north of 43p as my feeling is their market is open to plenty of competitors dipping in.