Small Cap Value Report (Fri 3 Nov 2017) - IPOs, HAT, SOS, FOOT

3rd Nov '17 by Paul Scott

41 comments 18582 reads

Good morning, it's Paul here!

Here is the (now usual) placeholder article for readers to discuss the morning's trading updates & results statements, from 7am.

By the way, please see the header for the stocks I am intending to write about today. Yesterday's article fizzled out, so I shall be revisiting that this afternoon, to finish it off.

H & T (LON:HAT)

Share price: 333p (pre market open)
No. shares: 37.3m
Market cap: £124.2m

Trading update - this is a pawnbroker chain of stores. Graham is keen on this one, and often covers it. Things are going well;

H&T is pleased to announce that the strong trading performance of the first half of the year has been maintained. The gold price has also remained broadly in line with the first half which benefits the Group's pawnbroking scrap and gold purchasing segments.

As a result, we expect that our full year profit before tax will be above current market expectations.

The CEO says that he's confident about the future outlook.

It's a pity that the company has failed to explain by how much it is exceeding current market expectations. Plenty of other companies report specifics, by giving their own projection for full year profit - so this really needs to become standard.

Instead we have to play the silly game whereby the company will brief analysts on the numbers, who then publish updated forecasts which many private investors can't get hold of. An utterly crazy system, badly in need of reform. Companies can & should be pushing for more openness, so that all shareholders are made aware of the numbers, not just institutions & professional investors.

Valuation - based on the existing forecasts, the valuation looks quite good value;

A lowish PER - although this type of business rarely receives a high PER.

Moderate dividend yield.

Note the Price to Tang(ible) Book (Value) - at just 1.48 this is excellent - demonstrating that the company has a solid balance sheet, with strong asset backing.

In the "Other ratios" box, note the green (positive) blob next to current ratio - which is outstandingly high, at 12.6 - again confirming that this company is very soundly financed, so won't be going bust…

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davidjhill

3rd Nov '17

I have a question / muse for everyone on Seeing Machines (LON:SEE)

This had been on my radar from a long time ago but always felt there was too much "Jam tomorrow" even following its deal with CAT so steered clear. However, I have recently changed my view and have bought a few. The technology is good and with semi-autonomous and autonomous car industry acceptance on the increase it appears the big car manufacturers are starting to buy its product.

So my muse is this.

The company (either to its great credit or great folly) has provided revenue projections for the next couple of years that treble and double. The element that slightly vexes me is that on the one hand they say that these new revenue projections take into account the company's constrained balance sheet. On the other hand they talk about ongoing discussions to further fund the business. So it seems that we can reasonably assume a fundraise is coming and if it is equity based then a likely discount to current share price. For this reason I only bought circa half what I'd like with a view to buying more in a placing.

BUT if the revenue projections are anywhere near accurate then this business could be very very cheap and capture the imagination of investors at some stage soon in a similar manner to the way IQE has on facial recognition wafer, given the IP.

Interested in Paul/Graham or anyone else's views on the company. Strikes me Seeing Machines (LON:SEE) is right in the sweet spot for this group so I'm sure there are some well considered opinions on the topic. Naysayers thoughts also very welcome as I'm not just looking at my own bias.

simoan

Understand why you sold out but in defence of Character (LON:CCT) management, the year ended 31st Aug and ToysRus went into admin around 19th Sept at which point all the monies owed to Character became a bad debt and they would be left with a load of Christmas stock they could not dispatch to them as they probably didn't have critical supplier status.

Yes, understood. But to some of us putting out a "significantly below" trading update at 8AM is simply indefensible. I don't want to retread old ground but if you add to that the sudden departure of the CFO at a board meeting a few weeks before, and the gradual "inexplicable" share price decline in advance of the trading update... it just gave off too much of a bad smell. There are plenty more fish in the sea...

All the best, Si

tic_tac_toe

here goes stoopid question of the day: if FOOT is run by founders of JD. then why would they not jut run the company under JD Sports rather than a separate listing. TO my mind that would reduce any listing costs.

Is there any merit sense in this position?

vik2001

@Paul I like going to the gym and yesterday coughed up £70 for a pair of wrist wraps supposed to be the best on the market called Gangsta. I actually felt embarrassed to wear something around my wrists labelled that name. But got it because they are the best around even at that price tag, So I guess it pays companies to include gangsta in their image.

fwyburd

Re Sosandar (LON:SOS)

It's not often I find myself expressing a professional opinion (I'm a marketing guy) here but however smart management are, their branding and website are just not good enough. For instance, If I wanted to shop from their web front page, I can't without clicking again just to see what they're selling. And "Sosandar" is a very weak brand name, failing two of my B2C brand name strength tests (not easily transmittable and is more than two stresses long). Their brand representation also fails to be distinct (obscure their logo and you'll see what i mean) and there is no value proposition or clear definition of the customer segment(s) they serve. In fact, their website front page is mostly about them and not about what they offer customers which demonstrates a way of thinking that is not consistent with a strong brand. Without stronger marketing competence, I wouldn't invest in them.

timarr

We've probably all seen the adverts where a lack of emergency savings is normalised and people are encouraged to borrow at extremely high interest rates rather than suffer some minor inconvenience such as a few days of cold showers. It is debatable whether this is good or bad and whether consumer credit is ever in the borrower's interest or should even be allowed.

Indeed, I used to have cold showers every day at public school. Never did me any harm ...

Of course, if your local food bank has run out of anything edible or your old, knackered fridge has finally given up the ghost and you can't access short term credit there's always the alternative of prostitution or drug dealing. I mean, let's encourage private enterprise rather than an unhealthy reliance on regulated lending.

But given these cash loan interest rates anybody investing in H & T (LON:HAT) needs to be clear that a) they are exploiting and harming their fellow man, and b) their investment is at high risk of adverse regulatory intervention.

A Which study from a couple of years ago showed the hidden cost of the official alternative -

Which? research finds that consumers needing as little as £100 could be charged up to 12.5 times more by major high street banks than the Financial Conduct Authority (FCA) allows payday loan companies to charge, when borrowing the same amount for the same period.

https://press.which.co.uk/whic...

As Professor Servon showed, people make a rational choice to use payday lenders and pawnbrokers. They're not stupid, but value the certainty that they won't be charged unexpected amounts and the personal service they get from the staff. When I was a kid you got that kind of behaviour from the local bank branch where the manager knew your parents personally. Nowwhat you get is a child that thinks it's a management consultant with a stupid haircut trying to flog you stuff you can't understand.

Each to their own though, I shall hold H & T (LON:HAT) and Ramsdens Holdings (LON:RFX) until Jeremy wins the next election after which they probably won't be needed any more ... :-)

I think the big concern is PSD2 in the EEA. Direct carrier billing companies are excluded from the requirements of Strong Customer Authentication (essentially a requirement to do KYC and 2-factor authentication) as long as no single payment is over €50 and the total transacted is less than €300 a month. Whether that impacts Boku or Bango I know not, but it's got to be taken into consideration with the implementation date now only a couple of months away.

timarr

gsbmba99

"given the current volatility in the IPO market" and "period of IPO market uncertainty"
translation
We didn't get the price we were expecting to get.

TamzinPiworld

Just published, Gervais Williams, from Miton (LON:MGR), talking about the current macro picture, the problems, and the opportunities, for the investor:

http://www.piworld.co.uk/2017/11/03/miton-group-plc-mgr-gervais-williams-investor-presentation-october-2017/

He goes on to talk about Miton Group.

Insightful thoughts on flat productivity, mis-allocation of capital and the investing opportunities. Worth a watch.

cic

I concur this view having perused their website. It does seem to me that the clothing they purvey is occasion sort of dresses etc. I know some women like to wear a different dress for each occasion, and I wonder if return rates could go higher as people decide that they can buy a dress, wear it carefully for an event, and then send it back. Must be a temptation to some.

Trident

It must be particularly galling to get to the edge of an IPO, and then to pull. The fees for getting to this position are eye watering for often quite small business. I have heard its now at least a £1m in terms of fees to float on AIM.

Arguably the prospectus, and the board, and having some integrity are the three most important things, other then than the viability of the business itself. Once floated there is very little stick to beat companies with, for any subsequent lack in these elements.

In some cases of floated foreign entities, all the pre IPO did was to put lipstick on a variety of pigs, which were as close to disguised fraudulent intent as you can get.

Really its aching for some disruptive model, because most of the £1M+ fees are ultimately ultimately of no protection to future shareholders.

Sutherland

Re Paul's comment under H & T -all shareholders should be made aware of the numbers, not just institutions and professional investors. Several companies in which I have shares invited to give them my Email address so they could send me news of the companies activities. Few of them go so far as to let me have the numbers they make available to institutions.

I believe companies should be encouraged to ask shareholders for their email addresses and should be obliged to communicate the information given to institutions to shareholders who have given their address on the day they hold presentations.

Gromley

But given these cash loan interest rates anybody investing in H & T (LON:HAT) needs to be clear that a) they are exploiting and harming their fellow man,

As a former Director of a Credit Union in London of course I have a lot of sympathy with this view, but it is actually fundamentally wrong.

The "high risk, high rate" lenders don't create the problem, they address / exploit it.

Yes the rates are eye-wateringly high, but as someone pointed out above to a large degree this is all about pricing in risk. In fact this corner of the market is actually quite busy now so in fact the opportunity is there for shopping around and whilst the cost of credit doesn't seem to be a significant market play at this stage the opportunity is definitely there for "ethical lenders" to make price a key competitive advantage - so long as they can at least break even when considering the defaults.

I certainly agree that the high rates can cause debt to spiral and exacerbate the problem, but there is not a better option being provided by society. (Credit Unions even do not really address this, as they will generally only lend after they have formed a relationship with you as a saver and even they suffer some serious bad debt issues - largely due to borrowers misleading them).

"Regulation" should certainly be tightened here, but that is absolutely NOT about rate regulation that will only serve to ensure that the highest risk lenders will be excluded and forced into the illegal lending market (you think bailiffs are bad - think again!!) ; instead the "regulation" needs to be about ensuring borrowers have access to (and are directed to) proper advice and counselling.

That would certainly quell the market for this kind of lending, but will not kill it out-right.

None of these lenders (AFAIK) are currently so benevolent that they direct you to credit guidance services etc before they lend to you , but the level of ethics is perhaps about how clearly they explain what you have to pay (the rate itself & therefore the total cost is not that relevant to people under financial stress) and how far they assess real affordability.

I honestly do not know how H&T stack up in this respect, but having taken a small "trading" stake today I do intend to find out.

As a quick aside rant, I am reminded of my experience a few years ago when we were buying new sofas and chairs etc. - I had a clear idea of how much we were prepared to spend (and had the cash) - but as "interest free credit" pervaded we were going that route. In one retailer we found a "suite" we really liked and were discussing the different options (including some that involved paying interest but with a discount on the price!) Several times I asked them how much a particular setup would actually cost and every time the only answer they would give was a long the lines of - ohh on this one you would only pay £15 per week - they only wanted to sell me apparent affordability they could not seem to grasp that my frame of reference was that I wanted to know how much the goods I would buy would actually cost. Yes I could have worked it out for myself, but I left in disgust - it was totally clear that they only wished to convinced me that I could afford to pay for their product and had no interest in convincing me that they were offering a valuable proposition.

That imho is far more dangerous than "the money lenders".

jules2k6

I agree, I have used payday loans a few years back and they helped keep me going through a difficult period.

Paul Scott

Hi fwyburd & cic,

I'm not sure that you've grasped the specific niche in womenswear that Sosandar (LON:SOS) is targeting.

The ladies who set up Sosandar have long experience in fashion magazines, setting up the successful "Look" magazine, for example. Their insight was that many readers complained that there was a yawning gap in UK fashion retail for women aged 35-55, who were too old for younger brands like Asos, but not ready to go frumpy with M&S.

Sosandar has designed its own product, designed to specifically fill this gap in the market. So note that a lot of their dresses have longer sleeves & hems, designed to be flattering to a figure that may not be perfect.

I've conducted my own (limited!) market research, and shown the website to women I know what are the target age, and they all loved it.

The website is not designed to look like other eCommerce websites. It's meant to be a hybrid between a fashion magazine, with editorial about the clothes, seasons, what goes with what, etc., and a transactional website - this has the advantage that slower moving product can be stimulated with some editorial & photos which showcases it.

Note that all product has a short video of a model wearing the item & moving around in it, which really brings the product alive I think.

The marketing has been amazingly effective to far - and is focussed on celebrity endorsements & brand ambassadors. This page is very impressive, for a business that is only just over 1 year old. If they can achieve that much in a year, then I think there could be a bright future ahead;

https://www.sosandar.com/style...

That page also gives an idea of the target customers.

I've done quite a bit of work on this one, and I think management at Sosandar really know what they're doing. It remains to be seen if the company can grow fast enough to achieve take off. Or whether growth will be too slow, and then require another fundraising in 2020.

The product isn't special occasion wear. As you can see from the link above, it's stylish stuff for 35-55 women to wear to work, nights out, whatever.

Suggestion - if readers have wives or daughters in the 35-55 target age group, perhaps you wouldn't mind asking them what they think of the Sosandar product. I'd be interested to hear more feedback.

Just to reinforce, this one is highly speculative, and could flop if growth does not meet expectations. So higher risk than most of my more usual things.

Regards, Paul.

AstonGirl

4th Nov '17

"Suggestion - if readers have wives or daughters in the 35-55 target age group, perhaps you wouldn't mind asking them what they think of the Sosandar product. I'd be interested to hear more feedback."

Paul, an excellent suggestion but it may also be possible that you have a few loyal female readers & investors in that age range who could comment

I note that the rest are of my reply went awry but it was to the effect that I'm firmly in this age range & have my tongue firmly in my cheek

LeoInvestorUK

Re: ethics of high rate lending
I was aware that my contribution was rather off topic and perhaps ill conceived in a thread about the day's smallcap news and tried to keep it short. Perhaps in so doing a couple of important points I was trying to make were lost. Now it is Saturday hopefully this is less of an issue.

I tried to make it clear that over short periods / small amounts high interest rates can be justified. Rather I specifically cited borrowing £5000 over 12 months at 180% APR. This means that if you fall behind and can only pay the interest, that's 180% x £5000 = £9000pa forever. Who could possibly afford that, let alone principle repayments on top? (Answer: A relatively rich person with a large excess income every month they are either saving or wasting and therefore has no need for a loan). The same argument scales down to smaller loans and disposable incomes.

This is how it should work:
1) Borrower comes in.
2) If borrower can afford interest at 180% APR (or whatever is necessary) then money is advanced (as hopefully at present). If not they are given credit guidance, including an explanation of why they can't afford the loan, what to do next, (what should be) the unenforcability of any loan they are offered on the same facts and the implications of making false declarations.
3) Once a borrower has demonstrated they can maintain payments for a few months (and therefore are not fraudulent or a fantasist) the rate should be cut but the monthly payment stay the same.
4) Once the loan is paid off they are contracted to continue to save with the same monthly payment.
5) Both their time lending and saving should equally count towards their credit rating (it is madness that somebody who has proven the ability to save over many years struggles to borrow money!)
5) Once they have saved the original borrowing amount they are free to stop saving and use the amount as an emergency fund, or to continue saving e.g. for a house deposit.
6) Institution makes money on normal rate lending and borrowing.

I strongly disagree that lenders "don't create the problem". Their advertising most definitely does create and exacerbate the problem. As I said, they go out of their way to normalise not having an emergency fund. For example there are a number of adverts which start with the boiler or car going wrong and don't even touch on the possibility of savings before suggesting you borrow at 500% APR to fix it. They explicitly ask "why wait?" when encouraging people to borrow for things that could be waited for, aren't really needed or quite often won't even be used.

I'm not completely against consumer credit, or use of credit for emergencies. For example, which is better:
a) A mortgage of £100,000 costing 2.5% and an emergency fund of £10,000 paying 0.5% that is used once every 5 years, or
b) A mortgage of £90,000 costing 2.5% and a £10,000 line of credit at 5% that is used once once every 5 years for a few weeks while you re-borrow the excess mortgage equity?
I have an arranged overdraft at 50%APR to cover very short term cash flow issues before I can borrow / transfer money from elsewhere, much better than always keeping a minimum £1000 balance paying nothing.

But I maintain 180% APR beyond anything but the very short term is exploitative, is unaffordable by anybody who actually needs the money and serves nobody.

As for loan sharks, what is the difference between demanding protection money and lending money then demanding repayments - both are equally unenforceable and illegal? Is this a police enforcement issue, or merely a false feeling of debt on the part of the victim?

Finally, what is the difference between profiting from H&T because they are better than loan sharks and actually being a loan shark who offers slightly lower rates and/or fewer broken fingers than the rest?

chrigil

5th Nov '17

With regards to Sosandar (LON:SOS) If anybody knows this industry Paul it's you however, in an attempt to find reasons not to invest (something I do with all my potential investments) I would just say this:

1) I agree with the poster @fwyburd with regards to the website. It's too much form over function and the magazine element has been taken too far. I have no doubt the most women in the target audience age group would love it if asked; it looks fantastic but I've no doubt that professional task based user interaction testing would offer poor results. Browsing the site (as you would a magazine) is great, finding a specific product within a reasonable time period requires a whole different site architecture. Just try picking up a magazine and finding a specific paragraph or even article without any index or context. It gets pretty annoying pretty quickly.
It'll be interesting to see how the site evolves over time. BooHoo had an awful site for years and it didn't stop them!

2) On the subject of returns, with Sosandar being around 44%, I remember reading an article back in December 2016 where Carol Kane said:

“The teenage wallet has its limitations, We don’t have a high returns rate: our shoppers don’t want to tie up their money. If they are spending £20 on a dress they won’t spend £40 ordering two sizes. They don’t have that kind of money. It is quite different to the middle market.”

It's certainly an interesting idea that I'd never considered. That their customers' lack of money actually benefits to BooHoo and could be a negative thing for a company like Sosandar.

https://www.theguardian.com/bu...

Jenny Williamson

6th Nov '17

"yawning gap in UK fashion retail for women aged 35-55, who were too old for younger brands like Asos, but not ready to go frumpy with M&S."

I am firmly in that target market but find the website boring and many of the items unflattering and frumpy - only a few items that I might not expect to find in M&S - and even they surprise themselves sometimes! Im also confused by their price point - they have a shearling coat for £795 - why would I buy that from a low price point website? All a bit of a mish mash and very unexciting IMHO. I won’t be buying any time soon.

Small Cap Value Report (Fri 3 Nov 2017) - IPOs, HAT, SOS, FOOT

H & T (LON:HAT)

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Paul Scott

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