Small Cap Value Report (Fri 30 Nov 2018) - EPO, FDL, TET

Friday, Nov 30 2018 by

Good morning! It's Paul here.

Graham couldn't find anything of interest to write about today. So I've agreed to step in, and write some stuff about 2 interesting companies whose results/updates slipped through the net earlier this week.

Firstly, we have results from perennial dog, Earthport.

Earthport (LON:EPO)

Share price: 6.2p (flat on the day, at 10:20)
No. shares: 931.0m
Market cap: £57.7m

Final results

Earthport (AIM: EPO.L), the leading payment network for cross-border transactions, is pleased to announce its final results for the year ended 30 June 2018.

First red flag - slow accounts. It should not take a small cap 5 months to produce its accounts, especially a financial company - as it suggests that internal controls may not be up to scratch. Indeed, this is admitted;

The Board acknowledges that management accounting control and reporting errors took place in prior periods and changes to these processes and other decisive actions are currently underway to address the underlying issues. This includes increased monitoring of the FX business, increased controls and checks, stronger review processes and specific internal reporting changes....

It's been yet another poor performance this year from Earthport;

Revenues: £ 31.9m

Operating loss:  £8.5m

Earthport has been producing lamentable results now for 17 years as a listed company.

The balance sheet shows retained losses of £163.4m.

The story is always jam tomorrow. Then when failure is achieved, periodically management is changed, and the story changes. This year it's more of the same;

This year was a transitional year for Earthport where the underlying core payment business performed well despite the material setback of losing the business of a single large customer in Europe. The Board made significant changes to the leadership of the Company reflecting a change in business priorities and strategy ...  

The financial year 2018 began strongly and with high expectations for the year ahead, following a period of business growth in the previous year. In order to build on the expected momentum, the Company raised new capital to finance investment plans in capabilities and technology. However, it became apparent during the year that revenue was under pressure due to the loss of a major strategic payment customer and material delays occurred in the implementation process for another strategic partner....

Blah, blah, blah! I've been reading…

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Earthport plc is a financial services company. The Company provides cross-border payment services to business enterprises and banks. The Company's payments solution connects international payment and local infrastructures to provide clients access to global payment options via a managed service. Its service offers a range of options for connectivity, including application program interface (API), file-based solutions and Society for Worldwide Interbank Financial Telecommunication (SWIFT); validation and message transformation; advisory services for market entry and new product development; project management support during implementation; client funding options and liquidity management services, and various currency offerings to support a range of currency requirements. It has a range of country-specific checks and validations for payment processing, including modulus checks on account numbers, referential checking on beneficiary bank details and enrichment of beneficiary bank data. more »

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Studio Retail Group plc, formerly Findel plc, operates in the home shopping and education supplies markets. The Company's segments include Express Gifts, Findel Education and Overseas Sourcing. The Express Gifts segment includes direct mail order businesses in the United Kingdom, offering online and through catalogue a range of home and leisure items, clothing, toys and gifts supported by credit offer. The Findel Education segment supplies resources and equipment (excluding information technology and publishing) to schools and educational establishments in the United Kingdom and overseas. The Overseas Sourcing segment includes sourcing office based in Hong Kong supplying importing services to various group companies and external customers. The Company's subsidiary Express Gifts Limited, includes Studio, an online and home catalogue shopping; Ace, an online store for home, living and garden needs, and Health & Home, an online store for beauty, home, office and garden accessories. more »

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Treatt PLC is a United Kingdom-based ingredients manufacturer and solutions provider to the flavor, fragrance and consumer goods markets. The Company's geographical segments include United Kingdom, Rest of Europe, The Americas and Rest of the World. The Company's products include Essential oils, Citrus, Treattarome, Functional ingredients, Chemicals, Organic essential oils, Vegetable oils and Treatt brew solutions. Its Essential oils include Amyris Oil, Angelica Oil and Aniseed Oil. Treattarome products include Pineapple Treattarome, Honey Treattarome and Cucumber Treattarome. Its Citrus products include citrus oils, CitrustT, TreattZest and Citrus add-back range. Its Functional ingredients include beverage specialties, fragrance ingredients and sugar reduction products. Its chemicals include aroma chemicals, natural chemicals and Treatt Flavour Wheel. Its Vegetable oils include Borage Oil and Baobab oil. Its organic essential oils include Organic Aniseed Oil and Organic Lime Oil. more »

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34 Comments on this Article show/hide all

herbie47 30th Nov '18 15 of 34

In reply to post #423363

I have held the first 2 before and made good profits from them, I think the are still performing well but the share price has fallen considerably so I'm looking to buy back in. Keywords Studios (LON:KWS) I missed out on before, it's based in Dublin so maybe less affected by Brexit. Yes Value rank is low but higher than before and if they beat their forecasts then the share price should rise?

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simoan 30th Nov '18 16 of 34

In reply to post #423368

I have held the first 2 before and made good profits from them, I think the are still performing well but the share price has fallen considerably so I'm looking to buy back in. Keywords Studios (LON:KWS) I missed out on before, it's based in Dublin so maybe less affected by Brexit. Yes Value rank is low but higher than before and if they beat their forecasts then the share price should rise?

I don't know about anyone else but I think it's important to re-evaluate your approach now the market has changed. It's very easy to get suckered into buying companies just because the price has fallen a long way in a short period of time, and feeling like you "missed out" before is a dangerous condition to have. The momentum trade is over and lots of companies have fallen back to earth but are still intrinsically overvalued. As they used to say on Hill Street Blues... be careful out there!

All the best, Si

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Michael C 30th Nov '18 17 of 34

£Frontier Developments LON:FDEV) was on my watch list purely on technicals. I've never played a video game in my life except once in an arcade where I was blown up after about 14 seconds and lost my money, so I don't know how to value this business on fundamentals. :-(.

But I would like to read the half year results. Their website says due out today but at RNS search shows nothing. Anyone have a copy?

[Where am I supposed to put the pound sign on an EPIC code?]

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DMG2305 30th Nov '18 18 of 34

In reply to post #423363

When FEVRs PE has been in the 40's its usually provided a really good return and I too am considering topping up my 7% position. I think FEVR could continue to be a serious compounder for years to come and grow into a a high rating. If it catches on in the US who know where it could end up. Anecdotally I was out a Christmas ( I know its still November!) bash in a fancy bar in Dublin last night and they were stocked to the rafters with Gin and Fevertree tonics (all sorts). In addition it could also get gobbled up in a take over. I just can't see how you can go too far wrong if you buy and hold at current levels but I am biased.

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rmillaree 30th Nov '18 19 of 34

Fevertree Drinks (LON:FEVR)

This does look a quality business, it won't take many years of 20% + growth to get the p/e down to something sensible (i reckon they can possibly get close to pe 35 by end of 2020 - based on 2400p) - the shareprice is down 37% from its reasonably recent high so on that basis alone its a bargain compared to the price you would have had to pa a couple of months back.
The main attraction to me here is that the brand name looks very strong and in theory the amount of additional lines they can add should be many.

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sharw 30th Nov '18 20 of 34

In reply to post #423403

Put the £ immediately in front of the code.

Do not leave a gap or you will get this £ FDEV

Do leave a gap after or you will get this £FDEV's

Don't bother if it contains a numeral - it won't work - £D4T4 .

Otherwise Frontier Developments (LON:FDEV)

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simoan 30th Nov '18 21 of 34


I think it's difficult to just ignore a "known unknown" like Brexit and so it's increasingly important to see what companies are saying in the outlook section of results statements. I have to say I found the statement by Treatt (LON:TET) pretty weak:

There are uncertainties in relation to factors such as Brexit and US government policies, but in practice the desire of consumers to drink beverages is influenced far more by the weather than by politics.

What? So that's OK then, everyone loves drinking beverages and hence Brexit doesn't matter.

They likely source a number of the raw materials for their products from the EU (although this is not clear) and have customers based in the EU which accounts for up to 25% of revenues. I realise it's difficult to know exactly what will happen but I think they should be more open about how any changes to trade with the EU would effect them, especially since I don't believe they have any substantial business within the EU to help alleviate the cost of doing business post Brexit.

All the best, Si

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Gromley 30th Nov '18 22 of 34
it won't take many years of 20% + growth to get the p/e down to something sensible

Don't forget though that each and every year a 20%+ growth rate gets harder and harder to achieve!

I don't really know the dynamics for Fevertree Drinks (LON:FEVR), but I think I read some wag suggesting that the longer term forecasts were only achievable if every person on the planet is drinking it 24-7.

I used to say similar about some of the more outrageous Telecoms capacity forecasts until it became clear just how much time "the machines" would spend talking to each other. Perhaps "the machines" will also get a taste for a nice G&T?

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simoan 30th Nov '18 23 of 34

In reply to post #423433

I don't really know the dynamics for Fevertree Drinks (LON:FEVR), but I think I read some wag suggesting that the longer term forecasts were only achievable if every person on the planet is drinking it 24-7.

I'm sorry for posting so much recently, I will take a break soon. It's worth noting that Fevertree Drinks (LON:FEVR) have previously released pre-FY end "exceeding expectations" trading updates at the beginning of November but have not this year. Maybe that is something to do with the current price weakness.

All the best, Si

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rmillaree 30th Nov '18 24 of 34

In reply to post #423433

Fevertree Drinks (LON:FEVR)

Don't forget though that each and every year a 20%+ growth rate gets harder and harder to achieve!

but I think I read some wag suggesting that the longer term forecasts were only achievable if every person on the planet is drinking it 24-7.

Ref long term forecasts saying everyone will be drinking the stuff - that just seems nonsensical to me unless someone is expecting 20%+growth for way more than 3 years.

ref 20%+ growth - i am aware the growth rate will slow thats a given - but my pe of 36 in 2020 was pretty realistic - as you say i wouldn't expect growth to be anything like that after that date - the 3 years get the p/e down to something not silly.

Stockopedia is expecting 25% growth in 2018 and 17% growth in 2019 and i used 17% estimate for 2020 to get to the pe of 36 - all looks reasonable to me. 

Note Fever look like they are quite conservative with forecasts - thats a good thing - at start of 2018 they were expecting 40p EPS in 2018 and  now they are expecting 49p - that is some very nice in year upgrades. We shouldn't expect this every year however it give me confidence that they will deliver as things stand.

Who knows though until we get the next trading update - if they go of the rails the price is likely to drop like a lead balloon - there have been plenty of companies where the slowdown of growth has been quick and dramatic and that is a serious risk factor with this type of share that the story will run out of juice.

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Michael C 30th Nov '18 25 of 34

In reply to post #423423

Thanks sharw

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Gromley 30th Nov '18 26 of 34

Interesting goings on today at Allied Minds (LON:ALM)

c. 2% of the companies shares changing hands (half of which were in the Uncrossing Trade) and the share price up by over. 50%.

It has been a fairly "steady" climb throughout the day so there is no clear spike to indicate an definitive leak of information intra-day.

There is some mention of possible news amongst the "chat" but nothing material, so that could just be inventing news to explain the move and indeed the scale of the move could simply be a snowball from the initial moves up causing people to think that there is unannounced news.

No announcement from the company whatsoever thus far and given that the price was up by nearly 50% by early afternoon, that strikes me as a little odd. I'm not sure what the precise reporting obligations are in this respect, but I would be pretty certain they will be obliged to say something before the market opens on Monday.
(Either "here is the news" or "we know of no reason")

This is another of my tiny shorts and I toyed with whether or not to close earlier in the day, but as I'm still handsomely in profit and even at the close today the price is scarcely above where it was two weeks ago I decided to wait and see.

I'm still fine tuning how to react to news that may cause reactions greater than the true materiality (more often than not riding out the short term spike has been the best thing to do) so judging what to do in the absence of any news whatsoever is further down my learning curve.

It will be interesting to see how things unfold on Monday morning (my worst case now being that i get stopped out at break-even). But in the meantime if anyone has heard anything tangible, I'd be interested to hear.

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Julianh 30th Nov '18 27 of 34

In reply to post #423353

I think you are right about IG Design (LON:IGR) Tamzin. For some companies it is the business model or their monopoly position that creates a competitive advantage. In the case of IG Design (LON:IGR) it is the high quality of the management team. Since I first bought a few years ago they have executed faultlessly. And as they grow they seem to invest well to improve efficiency and price advantage. I also like their focus on choosing good customers (less likely to go bust or fail to pay) and turning them into partners.

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jules2k6 30th Nov '18 28 of 34

In reply to post #423423


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rhomboid1 30th Nov '18 29 of 34

In reply to post #423488

£D4T4 ...test response

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Gromley 2nd Dec '18 30 of 34

In reply to post #423468

I now see the news that will have triggered all of the excitement at Allied Minds (LON:ALM) on Friday.

Hawkeye  360 (48% owned by ALM) has three satellites on the SpaceX rocket that was due to launch today (now postponed until Monday I believe). This I believe gets the Hawkeye project off the ground (If you'll pardon the pun).

Bloomberg report

Goodness knows where the Allied Minds (LON:ALM) shareprice will go on Monday, but in many ways this strikes me as typical "story stock news" - very impressive, hugely supportive of the story, but with no indication of what the financial impact is nor when it will begin to deliver revenues let alone profits.

Hawkeye raise about $13m in November 2016 and the satellite fleet was due to be launched "in late 2017". I believe that they have raised more money since ($10m), so not only are they behind schedule they are also probably over budget.  How often is that the case.

What they are doing is actually imho a very interesting proposition, but I'm less convinced that it is a sound investment proposition at this stage.

Given the $23m (I think) raised by Hawkeye since November 2016 (I have no idea what they raised previously) and the 48% ALM ownership, a £50m increase in ALM's market cap might seem a little rich.

The story and the shareprice surge may well continue for a while, so <b>perhaps</b> I would be wise to close my short and reopen if and when it fizzles out, but I attempted that plan wrongly on another stock, so my options remain open here. I will live and learn.

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Nick Ray 2nd Dec '18 31 of 34

In reply to post #423778

That's the trouble with very low quality stocks. It may be down -60% over a year, but the annual volatility is a crazy 80% which makes it a difficult stock to work with - short or long!

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Gromley 3rd Dec '18 32 of 34

In reply to post #423793

Still no announcement from Allied Minds (LON:ALM) (shareprice up another 15% on Monday) so we are left to assume that the speculation is due to HawkEye360 completing one of the very early milestones in its business plan (for all of the excitement, that is all it is).

The three initial satellites were succesfully deployed by SpaceX. I watched the launch live.

As a kid I recall the excitement of watching some of Apollo missions and then later the Shuttle launches - this is not too far behind in the excitement stakes and there was a fantastic bit of reverse parking to land the stage one booster on the deck of a ship.

Apparently the attempt to catch the "fairing halves" in a big net failed (Not sure if there is any video of this) but this is all okay according to Elon Musk : " Mr Steven is picking them up. Plan is to dry them out & launch again. Nothing wrong with a little swim."

You can view all of the excitement here (although as SpaceX are I believe making another launch tomorrow - you may have to search elsewhere on their site for SSO-A)


(Although as a disclaimer against subsequently being proven a gullible idiot, I have to say it would have been relatively easy to pre-record this in CGI!)

In relation to the investment case, however, I remain uncertain whether the value of HawkEye360 has really increased by £150m since last Thursday.

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timarr 27th Dec '18 33 of 34

As an end of year bonus for long suffering Earthport (LON:EPO) investors Visa have announced that they're buying them at 30p a share - that's six time the price at the time of this report, a month ago when Paul (accurately I think) described them as:

My opinion - it's a terrible business. The jam tomorrow promises have never come to anything, historically. Maybe one day, a viable business might emerge? There's no sign of that yet though.


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timarr 25th Jan 34 of 34

In reply to post #430413

And now Mastercard have trumped Visa's bid:

33p a share, a 10% premium to the Visa offer. Happy days for Earthport (LON:EPO) holders.


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About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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