Small Cap Value Report (Fri 24 Jan 2020) - Trade Alert, OTMP, SONG, REC, GTC, SMRT

24th Jan '20 by Graham Neary

51 comments 9230 reads

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…

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Graham Neary

24th Jan '20

re: Hipgnosis Songs Fund (LON:SONG)

Hi LumpedOn - appreciate the feedback! Some great points there. Best of luck with your position.

G

jonesj

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.

Brookeda

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.

fwyburd

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

Thornabian

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.

mojomogoz

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

doublelutz

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!

Hi SundayTrader, a piece on Getech (LON:GTC) has been added to the report. Thanks. G

Sorry, the GFRD update was on 9 Jan - I have to prioritise more recent news. G

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.

Martin Verlaine

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.

jwebster

25th Jan '20

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.

rmillaree

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.

xcity

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) .

Laughton

26th Jan '20

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/

Trident

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.

27th Jan '20

"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.

SundayTrader

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.

Small Cap Value Report (Fri 24 Jan 2020) - Trade alert, OTMP, SONG, REC, GTC, SMRT

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Graham Neary

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