Small Cap Value Report (Fri 7 Sep 2018) - BKS, G4M, SOM

Thursday, Sep 06 2018 by

Good morning!

I finished yesterday's report at about 6pm, so here is the link, in case you are interested in the completed sections on Frontier Developments (LON:FDEV) and McBride (LON:MCB) - both of which I think look quite interesting.

Apologies but I didn't get round to looking at EI (LON:EIG) . This is because the whole afternoon was spent planning & carrying out my latest Director interview, which I thought was a better use of my time.

Somero interview today

The interview audio file is here. Many thanks to readers here, who submitted some excellent questions a few days ago. I tried to name-check you in the call!

Beeks Financial Cloud (LON:BKS)

Share price: 103.5p (up 1.5% today, at 11:00)
No. shares: 50.7m
Market cap: £52.5m

(at the time of writing, I hold a long position in this share)

Results presentation video

Our friends Tamzin and Tim, at PIWorld, published a very interesting new video yesterday. It's the results presentation from Beeks. The CEO and FD talk through the presentation slides, then answer Q&A.

What particularly impressed me, is that some of the audience questions are quite searching. Management answered them honestly, and were happy for the video to go out as is. That gives me a lot of confidence. I'm sure that lesser companies would want the difficult questions edited out of the video, which does nobody any favours in the long run.

Other interesting points from this video;

  • Beeks has a stronger moat than I realised - the CEO said it took 5-6 years of blood sweat & tears to create its network of connections to over 200 financial exchanges worldwide - so not something that could be quickly or cheaply replicated
  • Strong organic growth, and rising gross margins expected - this should give a nicely leveraged benefit to profits. I wonder if forecasts might be too cautious?
  • In the past, there was little to no sales effort - growth came from inbound sales enquiries, often referred by the exchanges themselves. This is remarkable in itself. However, Beeks is now building a proper outward looking sales force. This could turbocharge growth, I hope
  • Despite a revenue miss…

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Beeks Financial Cloud Group PLC is a United Kingdom-based provider of custom computer programming company. The Company is focused on providing niche cloud computing and connectivity services for automated trading in futures and forex financial products. The Company’s platform designed for latency sensitive automated trading environments and provides on demand low latency computing resources to its clients through its direct connectivity. The Company offers server infrastructure and connectivity to its clients which enables same day trading of forex and futures on financial exchanges and trading venues. The Company’s products include dedicated server, VPS, and Co-Location. more »

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Gear4music (Holdings) plc is engaged in the online retailing of musical instruments and equipment. The Company sells its own-brand musical instruments and music equipment alongside with other brands. The Company offers over 1,500 products, which are sold under approximately eight brands, including Gear4music; Archer, which offers string instruments, such as violins, cellos, violas and double bass; Redsub, which offers bass guitar amplifiers and pedals; SubZero, which offers guitars, amplifiers, mixers, speakers and audio electronics; Minster, which offers digital pianos; Rosedale, which offers woodwind instruments, such as clarinets, flutes, oboes and piccolos, and Brass Instruments, which offers trumpets, trombones, tubas and French horns. The Company has developed its own e-commerce platform, with multilingual, multicurrency and responsive design Websites covering approximately 19 countries. more »

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  Is LON:BKS fundamentally strong or weak? Find out More »

29 Comments on this Article show/hide all

Lion Tamer 7th Sep '18 10 of 29

In reply to post #397014

Re Revolution Bars (LON:RBG)

For those too lazy to Google / DuckDuckGo Palmer2's reference, the site is here:
There is a £1000 p.a. (less 25% first year) pay-wall, but the key info is contained in the teaser & Palmer2's post. Who knows if it'll come to anything, that is assuming it to be accurate.

Disclaimer: Small portion of my fun-money is sitting in a handful of RBG shares, having bought back in last autumn, soon after the last disappointment & price drop. Currently stilling on a modest loss, so like Paul I have my fingers crossed, mainly due to my hurt pride.

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tic_tac_toe 7th Sep '18 11 of 29

If we're talking Revolution Bars (LON:RBG) I popped into their putney venue for lunch this week. met the general mgr (of 10 years) and enjoyed a very reasonable burger chips and drink lunch for £6 The manager even gave me a tour around the premises and talked of their plans over the winter. It seems they get quite a bit of freedom to put forward an investment case to push sales along.

It was encouraging to hear that the manager had 10 years of service. Gave me about 30 mins of time and discussed the site, its issues and strategy for picking up daytime sales (inc new food menus about to drop)

I came away with a very positive stance on the company. Esp so gives the gloomy valuation.

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vik2001 7th Sep '18 12 of 29

In reply to post #397014

nice spot, Ive bought back in after reading this. I sold out earlier around the 170p mark
lets hope a takeover occurs.

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Hannah78 7th Sep '18 13 of 29


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extrader 7th Sep '18 14 of 29

Hi Paul,

…"This will result in a reporting cycle that is more compatible with the Group's seasonal trading pattern and will avoid timetable conflicts with attendance at trade events that are important to the Group...."

I'd have thought - if management were half-way up to snuff - that they'd have worked this out already.....?


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cidunn 7th Sep '18 15 of 29

RE. Revolution Bars (LON:RBG) late RNS just came through regarding media speculation on a Deltic aquisition
Board confirms preliminary dialog - i.e. calm down

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DJCP 7th Sep '18 16 of 29

@extrader post #14

My initial thoughts on this Y/E date change was to ALSO coincide with the financial (tax) year.

With regards to the trade events - Perhaps as they're expanding, more emphasis (work) is being given to these events, or it may be that some events have become more important than others, and these one(s) just happen to conflict with their current Y/E. Possibly the event date(s) have moved although I undestand that could happen again ! lol

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Paul Scott 7th Sep '18 17 of 29

Sorry, I didn't get round to covering EI (LON:EIG) as the whole afternoon was spent preparing for & doing the audio interview with Somero Enterprises Inc (LON:SOM) . I'll try to circle back to it at some point.

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Brookeda 7th Sep '18 18 of 29

In reply to post #397129

No worries Paul. Thanks as always for your commitment and have a great weekend

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WDWombat 7th Sep '18 19 of 29

Pretty good. Especially useful to know at least the name of the major competition to G4M which I did not though am not blind to Amazon competition in so many retail spaces. I am a holder. On the capitalisation of software development there was a thorough and illuminating article in the Times a few weeks ago covering the increasing reality of intangible assets in a digital world. It is a complex subject - I know it can be used to disguise shortfalls in real profitability - but with so much expenditure now going on soft assets rather than nuts and bolts it is of increasing importance to a least try to get to grips with it. I have no problem with EBITDA, by the way, but I do not like the way some companies lump in staff share grants in an adjusted profit statement. I am with Buffet on that one. They have to be paid for by shareholders.

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Lion Tamer 7th Sep '18 20 of 29

Just listened to the Somero Enterprises Inc (LON:SOM) recording. The management team sound confident in the business's future. Very reassuring.
Many thanks Paul for the hard work that clearly goes into the preparation and execution of one of these interviews. I for one really appreciate your work.

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gary3980 8th Sep '18 21 of 29

Paul, just to echo the above thanks for the Somero Enterprises Inc (LON:SOM) interview - as a current shareholder it was a good listen. Much appreciated!


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Trident 8th Sep '18 22 of 29

I fully expect the Revolution Bars (LON:RBG) shareprice to rise on speculation. No great shakes in that prediction, I guess. But shareprice rises could play an interesting part in the potential ratio of shareholding that Deltic propose for any merger proposal. From memory they were proposing previously a third third (RBG)/two thirds split, with Deltic taking over the management reins. However, as that was very anti the Revolution Bars (LON:RBG) board interests of the time, no doubt that was part of the reason the conversations never really progressed as much as the cash offer from StoneGate. With some different RBG management in place there is less history, and perhaps a bit more sensitivity by Deltic to that as an issue.

My guess is that the RBG shareprice may bounce up to £1.7ish on speculation. Who knows perhaps StoneGate may also revive their interest as a spoiler.

I am holder.

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Paul Scott 8th Sep '18 23 of 29

In reply to post #397164

Hi WDWombat,

Just to clarify, I have no issue with capitalising development spend.

The problem is that if a company does capitalise development spending, they cannot then quote EBITDA as a meaningful number. This is because EBITDA ignores both the development spend itself, and ignores the amortisation of development spend.

So in effect, by quoting EBITDA, tech companies are trying to pretend that an often highly significant part of their payroll costs simply don't exist.

This is why I always flag the issue, when a company capitalises development spending, and is keen to steer investors towards EBITDA. It's then for readers to decide how you view things, I just feel obliged to point out that the EBITDA number in some cases is not a realistic measure of real world performance.

Where companies don't capitalise development spend, then EBITDA can be quite a useful proxy for cashflow. I tend to rely more, or less, on EBITDA (as one of many metrics) depending on the sector, and nature of each business.

A rather dry topic for Saturday afternoon, so I'll leave it there I think!!  ;-)

Regards, Paul.

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Carey Blunt 8th Sep '18 24 of 29

I'm a bit confused why Revolution Bars (LON:RBG) getting into talks to buy Deltic would be a good thing. My memory is a bit fuzzy on the whole thing but if I remember last time....

  • Deltic proposed to merge/acquire Revolution Bars (LON:RBG) rather than have RBG be sold to Stonegate.
  • That didn't happen because actually Deltic wasn't a great business and couldn't afford it (I may be over simplifying here)

So if we roll on some time to now, RBG's trading has deteriorated and rather than fix their issues they think merging with or buying a business they previously thought was too low quality is now a good idea?

I'm not sure that I see where a lot of shareholder value gets created in that scenario, I think maybe it makes a larger deteriorating business.
it might be a good short term trade to ride the speculation but is it a good move for Revolution Bars (LON:RBG) and for the long term future of the business and share price?

Happy to be corrected,


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Howard Marx 8th Sep '18 25 of 29

In reply to post #397264

The Revolution Bars (LON:RBG) response to Deltic's offer (09/10/17) gave a detailed list of objections, NONE of which referred to the quality of Deltic's franchise NOR the logic of combining the two businesses. Moreover, the new CEO at RBG may view the world differently to his predecessor.

Last year's observations in full were:

"The Board draws the attention of Revolution shareholders to the following key points:

· The Board does not believe that the merger proposal would create shareholder value for Revolution's existing shareholders in excess of the certain and immediate value represented by the recommended 203p cash offer from Stonegate Pub Group Limited ("Stonegate"), which would be received by Revolution shareholders in early November 2017 if shareholders vote in favour of Stonegate's offer on 17 October 2017.

· There is no certainty or guarantee that the Deltic management team would be able to deliver either their forecast financial performance or the estimated cost synergies of the Enlarged Group that are presented in the Deltic Merger Proposal Announcement.

· Deltic's reported cost synergies have been developed without direct involvement from Revolution and Deltic acknowledges that the level of cost synergies might vary with engagement. The Board is of the view that the Company's business operations and financial performance may suffer if the cost synergies are implemented.

· Deltic's merger proposal would result in much greater indebtedness of the Enlarged Group compared to the current indebtedness of the Company.

· There is no guarantee that market participants would ascribe a valuation rating to the Enlarged Group that would be sufficient to contribute to a Revolution shareholder return in excess of the certain cash return offered by Stonegate.

· The merger proposal is not binding and it is the Board's view that a transaction would take several months to complete and in any event would not be completed until the first half of the next calendar year.

· The Board encourages Deltic to make a cash offer for Revolution rather than continuing to focus on its current merger proposal. "

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Carey Blunt 8th Sep '18 26 of 29

In reply to post #397269

Thanks for listing out the observations, very helpful.
I can't see that many of the observations from before will have changed or improved much this time round. I particularly don't like....

· Deltic's merger proposal would result in much greater indebtedness of the Enlarged Group compared to the current indebtedness of the Company.

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Trident 9th Sep '18 27 of 29

There was understandable reluctance by the previous Revolution Bars (LON:RBG) board to recommend a Deltic proposal (or even to engage to discuss) which would have a theoretical future market whilst there was a concrete cash offer on the table from StoneGate. Under Deltic I am assuming that most of the RBG board would have been replaced by Deltic, and those remaining would be subject to lock ins on their revised option holdings, so their future interests would have been academic. However, what was arguably fatal for the StoneGate bid for investor was that the price offered was just a smidge above its original float price, so although a premium to the actual price at the time, in the longer view a poor return by management to its original sponsoring shareholders

Here is a link to Deltic's last public statement on their results, made in July 2018:

This was the original Deltc merger proposal.

RBG shareholders were urged by Deltic to reject the StoneGaqte offer, and they duly did, but following the apparent lack of engagement by RBG directors, Deltic then withdrew. So understandably the then RBG CEO had to go.

All in all a bit of a mess. As Deltic musing on the benefits of the combined operations were largely one-sided, and without either side doing due diligence, their original offer was fairly speculative.

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cig 15th Sep '18 28 of 29

Re G4M and Amazon: while long tail niche markets are not so interesting for Amazon to attack directly, Amazon Marketplace is their weapon to attack all such markets at a very low cost by just providing a platform that leverages a highly competitive ecosystem of low margin small businesses collectively providing coverage and stock (and even curated catalogues via third party websites which send buy clicks to Amazon in exchange of commission).

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matylda 16th Sep '18 29 of 29

In reply to post #398999

£G4M could improve margins perhaps by becoming an Amazon affiliate and just send their customers there - Just a tongue in cheek comment :)

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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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