Small Cap Value Report (Fri 25 Sept 2020) - BOO, RBG, W7L

25th Sep '20 by Paul Scott

133 comments 12001 reads

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

Timings - TBC

Sorry I didn't manage to finish off yesterday's SCVR, I seem to feel permanently exhausted at the moment. Maybe I'll ask Jack to give me a day or two off next week?

The big news today is;

Boohoo (LON:BOO)

358p (up 10%) - mkt cap £4.4bn

(I hold)

Why is this fashion eCommerce business in a small caps report, newbies might ask? We've followed this share very closely since it floated, because I knew the original wholesaling business from my former employer being a major customer of theirs in the 1990s. Hence the potential of selling direct to the end customer was obvious to me. I, and many readers here, collectively made many £millions from the point where I was raving about it at c.25p per share, all the way up (although I personally sold out ridiculously early, worried about the valuation being too high!). I still haven't learned the lesson to ignore valuation when you find something exceptionally good. Right or wrong, that strategy of ignoring valuation is the one that has worked in recent years. Sooner or later it's likely to go disastrously wrong, but who knows when?

Back to BooHoo. There have been repeated allegations of malpractice (poor working conditions & low pay) in its Leicester supply chain, which combined with a duff shorting dossier from Shadowfall (Matt Earl), has caused the share price to be volatile. I was waiting for a nice buying opportunity in BOO, as I've become more & more convinced of the bull case, as it hoovers up more & more brand names on the cheap, and repeats the same formula to build them up strongly as internet-only businesses, using the BOO infrastructure. That opportunity came in July 2020, with repeated (essentially the same as before) allegations that BOO's suppliers (NB not BOO itself, as all manufacturing is outsourced) were cutting corners, not just with the fabric! I know a lot of readers joined me, buying recently from 209p upwards, and we've cleaned up. So well done to everyone who had the nerve to buy when the share had just been in freefall. And many thanks to the shorters, and so-called ethical funds selling out cheaply, for providing us with this marvellous opportunity.

The independent report commissioned by BOO from a lawyer, was I thought due to…

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Paul Scott

25th Sep '20

Keep telling this to the boss!# And that miserable sod scobby dooh

Absolutely brilliant insight and worth the subscription fee alone

+27

Cheque in the post, I think we agreed 4.5%

MichaelFBS

”On Boo I’ll keep my views to myself as anything that questions it just gets jumped on! It’s quite a good case study on valuing growth companies.”

That’s a shame as contrary views are interesting.

I made 44% CAGR on my first foray into Boohoo (LON:BOO) which started late in 2015 at 34p (with top ups), which I held for 4 1/2 years. I am up 34% on second foray started on 17th June this year with seven subsequent purchases. So yes I am a bit of a fanboy but as I cannot see the bear case I would be very interested to hear one.

Kind regards

Michael

kgb1953

Michael it’s not a bear case. It’s that the current price or up to say 400 is quite a full. To get to 20p a share Boo will have to triple its revenue. What assumptions are made as to how they will do this? It’s easier to go from £300m to £1bn than from £1bn to £4bn. At some point PER will revert to the market mean of say 25 which means say 500p in a few years time.

They will require new products / new markets / new skills. Do the founders have the ambition to get there and how will they cope with scaling the business? Will they diversify away from what has been successful? Will they be able to make the right investments in people, systems and processes?

These are the sorts of questions I would be asking myself if I wanted to invest in Boo. I’ve read the accounts and also those of PLT when it was a ‘separate’ company. I’m not convinced and it’s not for me but many others like it. I have Next (LON:NXT) and B&m European Value Retail Sa (LON:BME) and happier with them.

Tonysaparito

jonnyrotten..What happened ..RNS was brilliant,..followed by a disaster of a presentation...made the BOD of directors look like amateurs...which clearly they now are , after destroying over 50% of Skin & MWG net worth

MiserableJacktPotato

26th Sep '20

The assumptions are, the world is massive and they have a foothold in most major markets that they can expand. They have a war chest of funds to buy up distressed retailers and turn them around using the Boo management experience and infrastructure.

Who cares if the founders have the skills to get there, that’s why they’ve hired very experienced fashion retailers such as Lyttle.

So, they have the markets, they’re buying in the products (as well as scaling the current ones) and they’re hiring some of the best leaders in the fashion trade.

I’m fully satisfied they have what it takes to be a monster sized company and will keep getting better.

mark1308

Great news on Boohoo (LON:BOO) up 50p ( i hold) . I thank Paul for showing me the way here and the fact he has prior knowledge of this company i am sure helped a look of Stocko folk !

Yes from another MARK B I could not agree more !

Michael C

Just in case anyone ever reads this and notices my mistake, the September quarter day is Michaelmas, 29th, and not 24th. Duh.

TheArb

27th Sep '20

“Shorters borrow shares at price X and sell them in the market on the hope/expectation that they can buy them back at a much lower price, Y, and return them to the original owners.”

should read “Shorters borrow shares and sell them in the market at price X on the hope/expectation that they can buy them back at at a much lower price, Y, and return them to the original owners.”

For a fee of course.

Price X is only really relevant for risk purposes to the short sale transaction itself not the borrow transaction (other than as a reference point for initial collateral).

Probably news to Matt Earl.

"For instance I recall buying Boohoo (LON:BOO) at 30 and selling at 40; recently I bought Games Workshop (LON:GAW) at 4700 and sold at 6000."

Sounds very black and white. Have you ever considered selling some of the holding and maintaining a holding, allowing you to participate in further upside? Think of overall capital exposure as well as share price.

Zipmanpeter

Paul,

In £RGB you explain in a CVA there may be tranches offering differing deals for different landlords. At the next suitable moments can you include a paragraph or 2 in your usual lucid prose about why landlords in a case like RGB agree to a CVA if they simply get (an overpriced) lease back - why not make the tenant pay until they go under. Is there typically still a 6 month notice period to work out?

I really appreciate the education through live example approach you deliver - so thanks.

However, any other resources you (or the community) could recommend to learn about CVA's, pre-packs etc. I cant see a Stockopedia ebook for instance. It's going to be a big issue in next 12months!!

Like most on this site, I have some accounting and financial statement reading skills but I am not a professional and most accountancy texts are way to dense to access and anyway, what you write about so clearly are business strategies and decisions under-pinned by accounting rules. This is where the value for stock pickers lies.

ken mitchell

TheArb

I also, coincidentally bought Games Workshop at £4.60 and sold at £6.

I sometimes top slice as you suggest, but I sold all my GAW stake for investment reasons, and for investment reasons I usually sell the lot. Unfortunately for GAW that turned out to be a big mistake and GAW hit £100 recently!

For years now I’ve tended to sell on bad news or if having doubts. That works more often than not, but several times as the GAW bounced I (wrongly as it turned out) thought that if I hadn’t sold t £6 I would certainly sell now. So with hindsight that would have been just as wrong, albeit at a higher price! Selling decisions are imo more difficult than buying, but being over cautious tends to work better for me than being too gung ho.

Richard Goodwin

Corporate insolvency for dummies (not a personal comment on you)

And another

A Company Voluntary Arrangement is mechanism often used in property lease intensive businesses to manage excessive lease costs. essentially the firm negotiates with their big landlords and reaches an agreement. All landlords vote on it and if a certain proportion agree then it applies by law to all of them eg if the threshold % of landlords agree to a 25% rent cut then they all have to give the company a 25% rent cut.

Administration is when there is a potentially good business with rotten finances, so the Insolvency Practitioner aims to save the business. The calculation is that the business (or parts of it) are worth more if they are operating than if they are liquidated. In this case debts are left behind in the old company and it is the IP's responsibility to pay as many of them as possible from the sales proceeds.

Administration may be planned in advance (a pre-pack administration) or not. A pre-pack inevitably means that the previously previously controlling party buys it back on the cheap. The logic is that this minimises disruption to the business, maximises the value of the business and saves jobs. Presumably this was able to be used by £Quiz because the trading arm was in a separate subsidiary and the debt was non-recourse to the parent. It was only a trading arm which was put in to administration. Otherwise shareholders would have been on the hook for the debt/contracts - very cunning - but I haven't checked this. If the Plc had gone into Administration then the shares would probably by worth nothing.

Winding up by the court, an unpaid creditor petitions the court to wind up; the company in order to get payment on a debt. If a court order is issued the this usually becomes a compulsory liquidation. The biggest user of this is HMRC as they have first dibs on the assets of the liquidated company. Shareholders tend to get nothing.

Liquidation (creditors voluntary) the business is shut down and assets sold off by an insolvency practitioner. In this case unsecured creditors tend to get little and shareholders nothing.

Liquidation (Members Voluntary) is when the company is financially sound but owners decide to wind it up so all creditors are paid out their full owings. This may be sued for example by an investment trust which has plenty of assets but poor performance and shareholders vote to wind it up.

Unless something has changed over recent years Receivership is well-known but rarely used.

I hope it helps.

The Ox 2906

Re : Boohoo (LON:BOO) Hi Paul, I understand you know BOO inside and out and have made some cracking calls, by now (Sunday evening) you’ve probably read the full report by Ms Levitt. I haven’t, but I did read the “in-depth” article in the FT and a few things really raised a red flag to me.
Among them: “the worst working conditions I’ve seen in the UK” said by the auditors in 2019. From the report : “supply chain had been inadequate for years, well below the standard expected of such a company”, a full list of suppliers and subcontractors did not exist. On one unannounced factory inspection by auditors 10 people left through a fire exit! At another visit 2/5ths of the workforce left during the audit. Ms Levitt said some of the founder’s responses were “a cause for concern” and interviewing him “ a colourful experience”. Major red flags here IMO, a successful business and business model could still be redundant if the ethics of the people running it are allegedly dubious. I’m sure they’re out of the woods governance wise and the results will not disappoint but long term I’m sure it’s a ticking time bomb

AnonymousUser40634

Any idea why this is not reflecting in the StockReport?

Mark Simpson

28th Sep '20

Hi Paul,

Pre-pack worked best for Quiz (LON:QUIZ) because the store estate was a separate limited company and had no parent guarantees.

Do you know if Revolution Bars (LON:RBG) have similar arrangements? I suspect that given that they are discussing CVA not pre-pack that they don't (although they don't have an online business to protect either.)

I think the big risk is that they actually have the cash at the moment but it is rapidly running out. If I was a landlord and I wasn't sure of a viable business anytime soon but they had cash and hadn't fully paid me, I'd be looking at winding up orders to get the back rent now rather than take a risk on future trading in a CVA.

Still a high chance of a zero IMO and for that reason is in punt territory at best.

Thanks for overview of insolvency opens. The more I learn in investing, the less seems certain! I was not aware that small landlords could not hold their corner and could be forced to accept a rental cut in this way. (Also the supervisor in a CVA must be a responsible figure to withstand pressure from big landlords.)

One query left: what happens where leases are 'walked away from' ; does the landlord simply get the keys and an empty property plus fittings? There will be some bargains out there soon to rent if you have the funds and the right project.

Gromley

Any idea why this [the new shares issued by De La Rue (LON:DLAR) ] is not reflecting in the StockReport?

Because the shares were issued in July and the latest financials are to March ?

Small Cap Value Report (Fri 25 Sept 2020) - BOO, RBG, W7L

Boohoo (LON:BOO)

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Paul Scott

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