Small Cap Value Report (Fri 8 Nov 2019) - Mello, IDP, GAW, CTR, CGS, SMT

8th Nov '19 by Graham Neary

36 comments 9561 reads

Morning folks,

Today's report covers:

Mello
Innovaderma (LON:IDP)
Games Workshop (LON:GAW)
Charles Taylor (LON:CTR)
Castings (LON:CGS)
Scottish Mortgage Investment Trust (LON:SMT)

Mello London

Let me remind you once again that Mello London is coming up next week, on Tuesday and Wednesday.

Many companies which get covered in this report will be there, e.g. Creightons (LON:CRL), PCF (LON:PCF), Franchise Brands (LON:FRAN), UP Global Sourcing Holdings (LON:UPGS), Ideagen (LON:IDEA). And for the first time, there will be a presentation by IG Group (LON:IGG). (Disclosure: I'm long CRL, PCF, IGG!).

I'll be speaking three times at the event (don't know why I do this to myself!):

Tuesday at 11.30, Mello Theatre - Small Cap Value Report for Stockopedia
Tuesday at 14.00, PrimaryBid Room - "IFRS 16, what it means and how to use it!"
Wednesday at 16.50, Allenby Room - "Crash-proof: Investment strategies for recessions & bear markets" for Cube.Investments.

Mello conferences are terrific networking opportunities and are unique in the calendar of investor events. I'm sure many of you are already planning to be there, but perhaps this reminder will help to nudge one or two more people to go!

This has been a big year for movies - with Once upon a Time in Hollywood by Tarantino and The Joker already. Tonight, I'll be there for the opening night of The Irishman.

It's reportedly 3 hours and 30 minutes long - I already feel bad for anyone who orders a large Coke with their popcorn.

Final list:

Innovaderma (LON:IDP)
Games Workshop (LON:GAW)
Charles Taylor (LON:CTR)
Castings (LON:CGS)
Scottish Mortgage Investment Trust (LON:SMT)

Innovaderma (LON:IDP)

Share price: 63p (-1%)
No. of shares: 14.5 million
Market cap: £9 million

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ezlifeme

8th Nov '19

Great commentary on Innovaderma (LON:IDP) Graham (what ever some readers view may be of the specifics of this particular accounting treatment)

I find find it excellent because it has made me think more on capitalising such expenditure when its on the 80/20 rule of Mkt Cap

DYOR & let the Buyer beware

lightningtiger

I have been holding GAW for a while now and just received it's 4th dividend payment this year today. I particularly like the words guarentee income from new licences. This could mean we can expect an increased dividend payments in future.

The share price increase is also good news and worth waiting for.

jonno

Graham

Like you my portfolio has had a decent run during October and I also hold £CRL. Do you have any thoughts as to why the share price of Creightons has ticked up 15% or so during the last couple of trading sessions. This suggests that trading is going to plan or it may be a delayed reaction to the recent property purchase.

davidjhill

hi Graham,

re Innovaderma (LON:IDP) My understanding, though I could be wrong, is that it relates to payments made to digital suppliers to acquire customers rather than the purchase of a bunch of email addresses that it then markets to.
i.e. it creates an asset that acquires customers (presumably content and the like). That previous customer list becomes an asset and the company then spends money marketing to those customers regularly.
The marketing costs are expensed but the original acquisition is capitalised at cost. Then they look at that cost and impair the asset based on actual customer behaviour vs model. Given these are fast moving consumer goods (shampoo & tanning spray) I'd expect a previous customer list to have a lot of repeat purchases and so it looks to me like a value of £30 per previous customer is indeed conservative.

Given the debate amongst investors though it seems pretty obvious that management would be well advised to clarify this with specific examples, which shouldn't be hard to do.

I have written to the company and asked them to do so. I will let you know what I hear.

cheers
David

rmillaree

Ref woodford - fantastic article on this site digging into the detail of how the woodford investments morphed away from safer and larger caps over time into a more risky area.

Ok onto company specific updates
Castings (LON:CGS)
I have sold out of CGS this morning - note a warning to anyone buying this share it's highly illiquid with a huge spread - i put a reasonable limit order in and was lucky enough to get filled but i could have been sat with a choice of selling low or holding on against my better judgement.

My reason for selling is purely down to the worry that their high reliance on the commercial vehicle sector may mean they could have issues even if they hitting their operational target. It's a shame to sell as the company seem to be doing everything right and there is future increase in profits expected so i am selling against the tide in that the forecast number look decent - here are their comments ref outlook.

The commercial vehicle sector has reported a decline in order intake in Europe. Accordingly, we have seen a reduction in schedules from this element of our customer base, which represents 70% of group revenue.

The focus in the foundry businesses continues to be on productivity improvements within the production processes and the completion of the automation of finishing processes. We expect to see the benefit of this during the remainder of the current financial year and into 2020/21.
The programme of automation investment commenced in the machining business following the successful development of a pilot cell during the period. This will enable the business to achieve additional productivity gains over a number of years.

Innovaderma (LON:IDP)
I did some further reading with regard to this company (painful other place posting trawl)

I sort of came away with the impression that the company has to work very hard to get people to try/buy their product - some seem to love the products but some of the reviews are pretty brutally bad. I am guessing if we take skinny tan as the litmus test for the company there is two options (1) the brand will continue to go from strength to strength in which case repeat orders should quickly ramp up sales and profits (2) they may struggle in the crowded marketplace - my worry is that this type of product is one where everyone wants to try the amazing new product that has come to market and is advertised as being better than the rest, if its not better than the rest will they end up with smaller market share in future than they have now if the product isn't as good as the hard sell?. I am guessing if this is still stocked in boots how well it performs there over the next 18 months is a true test - if it can hold its space and continue selling then its job done.
You may have guessed at present i am not convinced the quality of skinny tan is good enough to get there but am watching now with interest - if future news is good then it looks like there may be very good upward shareprice movement. I did have a little chuckle reading the review where someone said they ended up with bright orange hands they couldn't easily get back to normal despite having a decent tan - hopefully that person doesn't have the stature of an oompa loompa. Note some of the bad reviews also mentioned poor customer service - i know there will always be moaners so the complaints may be unfair but if you do the hard sell then you need to back it up with customer service too.

Hi - yes, the review thing has come up before. However, be careful as you are using a tiny sample of negative reviews against a product that sells hundreds of thousands of units. I worked it out and the negative reviews are minute in number statistically and something like less than 0.1%.
Half of those relate to delays in deliveries as well. I'm not saying there is no validity in any of them but my experience of reviews is to filter out the 1* and the 5* as they tend to be "venters" and "disciples" respectively and are a poor representation of the overall population.

Ask yourself this - if the product is so bad and doesn't sell why did Superdrug stock it in so many stores and sell out of the product and why did Boots offer to stock it in 1600 stores and why do they have so many repeat orders in the DTC market. Several hundred thousand units a year and growing each year doesn't strike me as a bad product because a hundred or so people have a bad experience!

Richard Vasey

Graham.

Just a quick thank you for your interesting thought on companies with large share prices. It's not something I have ever thought of before but there is definite merit in what you are saying.

Always good to get some lateral thinking and find new angles for an investment strategy,

Graham Neary

You're very welcome Richard.

@jonno, re: Creightons (LON:CRL), it was mentioned positively on Twitter by @Glasshalfull1. This could have helped, and there are few other explanations for the interest in recent days.

Best wishes

Graham

Thanks Graham

I am not a great user of social media, but am aware of Glasshalfull and attended a panel presentation in which Glasshalfull and other successful small cap investors took part at Mello last May.

Also a big thank you for your hard work and quality of reports that you and Paul produce on a regular basis Have a great weekend.

Cockerhoop

Games Workshop (LON:GAW)
Hi Graham,
Just a quick point regarding your operational gearing observations. Games Workshop does not pass the licencing income through the revenue line they simply add licencing profit to operating profit (hence any increase in licencing income does not result in an increase in revenue).

Thanks very much Cockerhoop. G

Gary Leach

Hi David - thanks for your contributions on this subject these last 2 days. Presumably these customer lists will now also be used for cross selling into the new category due for launch in Q1 2020?

Hi Graham. I have just seen davidosh's Mello advertisement on the ADVFN board for IDP that IDP will be "will be one of those [companies] selected for assessment and discussion by a panel of research analysts". Whilst I'm sure the capitalisation of customer lists will make for some good debate I do hope this is going to be a fair hearing for £IDP.
I was rather dismayed by your post yesterday suggesting a slip in revenue forecast for the new category being a reason for the SP fall. Company revenue forecasts have been a lot more measured of late as they try to correct previous habits of over promising (presumably Keiran Callan influence vs HC). Current broker forecasts do not include any revenue for the new category in FY to Jun20 (launch costs are included) and despite the fact that the company will be launching in Q1 of calendar 2020 , as previously announced, they conservatively suggest that revenue contribution would be more keenly felt in FY2021. This is consistent with the recent more measured approach and I don't believe they should be beaten with old stick over it.

Kind regards

Gary

Gromley

Hi Gary,

I think this demonstrates the value of the comments section and the co-operation between posters (as both Graham & Paul have said at different times, this really is a team sport!)

Graham and Paul, cover a lot of ground in these reports and it is inevitable that they won't have followed all of the stories as closely as others (especially as those invested).

I did actually make the point about this not been a delay in the comments section on Wednesday,so it was there for all to see.

In fairness to Graham though, his point was not without validity.

The share price had fallen on the publication of the AGM trading statement and the fact that Graham could mos-interpret the comment about the new product timing,quite likely means that others did too.

So when Graham said :

"I've found a possible reason for the share price fall: what sounds like a delay in material revenues from a new skin-care category:"

(My bolding)

He was probably totally on the money. (I don't think the big share sale had commenced at that stage, although I can't be sure of that.)

I certainly a good thing are giving more measured statements about the prospects, however, I think it is fair to say that part of the statement could have been written more clearly.

As for Mello, I don't think Graham is on that particular panel (although I could be wrong). Either way it will be useful to get the perspective of other respected investors on Innovaderma (LON:IDP) . I will certainly report back if anything interesting comes to light. (To be fair I think they are covering at least 6 stocks in 45mins so it won't be too in depth.)

I don't think anyone around here has 'an agenda' in relation to IDP , but I personally always welcome it when others raise possible weaknesses in and shares I hold. Personally, whilst I can the logic of capitalising the customer lists, I do accept that it is unusually aggressive and is allowing them to report profits earlier than would be the case, if they fully expensed the marketing.

Thanks Gromley - any IDP Mello feedback would be appreciated.

iwright7

10th Nov '19

Graham,

I am surprised that there have not been more comments on your idea of buying the 10 most expensive UK shares. This is exactly the style of NickTrain, Terry Smith and Keith Ashworth Lord, all of whose funds have trounced the market. These type of high quality companies have one thing in common - They keep on winning, so fewer profit warnings to dent portfolio performance. It is the opposite of hunting for bargains and so simple.

WDWombat

Scottish Mortgage(SMT) - you can read a recent article from one of the two lead managers. Go to bailliegifford.com, click on insights and scroll down to read the investing philosophy of James Anderson and - perhaps - most of Baillie Gifford, the most successful fund management company in Scotland and perhaps in Britain. You can also, at no cost or obligation, subscribe to Trust, their magazine, which is a quarterly and always interesting to me.

SMT is still a reasonably good performer over 3 and 5 years but has indeed slipped over the past year. It has 22% in unlisted securities split amongst roughly 26 companies o/w the largest holding is Ant and the 2nd Mr & Mrs Jones. It is resolutely global (>50% in the US with Amazon 9% of the portfolio and for reference Tesla 4.6%). A further 20% is in Chinese companies and around 18% in the Eurozone. It is a FTSE 100 component and still, I believe the largest IT in the UK at around £7.5bn. It is at a small discount to NAV after the weaker performance but still at a much smaller discount than the bulk of this sector - 'Global IT'.

As most of you will know the best way to assess investment trusts is probably by using FE Trustnet and Citywire. But as we can clearly see in the case of SGT, past performance is not a guide to future results.

13th Nov '19

As promised a quick update on the Innovaderma (LON:IDP) discussion at "MelloBASH" (Buy,Avoid,Sell, Hold)

As I expected it was a relatively light-hearted and quick-fire session.

Kieran Callan was in attendance (If I understood correctly David Stredder informed him that IDP would be subject to discussion so he bought a ticket to attend)

Some of the panel were already quite aware of the company (one had bought shares directly from Mr Chaudry's sell off and one had been disappointed not to be invited to do so, but had I think bought in the market.)

A few of the panellists were initially quite sceptical, particularly noting the poor cash conversion and the capitalisation of intangibles.

Mr Callan then spoke for a few minutes :

He justified the capitalisation of the customer lists (i) they only capitalise a part of the normal cost of acquisition, which he suggested would be £12+ / customer; (ii) they have to justify it in detail each year to the auditors and (iii) the mystery new product will have a significant direct sell across opportunity to their tanning customers. He didn't explain the capitalisation methodology - but it was only a short slot.
He also explained that we Mr Chaudry indicated to the board a few months ago his intention to leave, they had insisted he should make a clean break (ie sell out hist entire shareholding).

This swayed a couple of the "doubting" panellists - the general view was "BUY" although IIRC a couple were still sceptical.

As an existing holder I was very encouraged by the session, not so much because of what Mr Callan said ("he would say that wouldn't he"), but more by his willingness to be there.

I had in my mind a bit of an amber flag with regards governance; firstly because of Mr Chaudry (*) and secondly because the company seemed to be quite inaccessible to shareholders with their outsourced Investor Relations. I'm hopeful now that we might see a bit more openness.

* I do not know much about the history re Haris Chaudry and therefore only have a superficial understanding of why he had a negative impact for some investors. My gut feel is that he was the sort of "character" that perhaps was needed to kickstart the business in the first place, but probably not the kind of more measured individual needed to take a listed company on the next step.

Unfortunately I had a train to catch,so wasn't able to stick around afterwards to try to speak directly to Kieran - if anyone did, it would be great to get some more feedback.

Overall then a pretty positive view of Innovaderma (LON:IDP) from the session.

My current position in Innovaderma (LON:IDP) is what I would classify as a "full sized" position in my portfolio. I am trying to be very disciplined these days in not taking over large positions, but assuming the price does not soar away tomorrow, I am very tempted to buy some more.

I think the big share sale does still leave a significant overhang - some of those buying at 47/48p will be looking to 'flip' them for a decent return over a very short timescale.

Would be interesting to get a perspective from anyone else who was in the room - especially if anyone was able to speak to Kieran afterwards!

14th Nov '19

Thanks Gromley for that valuable feedback.

There is a longstanding, grown up and civilised Twitter group for IDP. The group had prior knowledge that Keiran would be attending and a member of the group tracked him down at Mello for an hour's chat and fed back to the group. I'm pleased to say that your feedback chimed with ours.

Would you like to join the group? If not I am sure I can put you in touch with the member who spoke with Keiran.

Graham / Gromley / Gary,

I couldn't make Mello alas but I have been impressed by the investor relations group and Innovaderma (LON:IDP) management response. As discussed on here previously I asked mgmt the question on the capitalisation. IR came back within a few hours, explained that mgmt were travelling and would revert in a few days. With no prompting I then received a full answer from mgmt a few days later. I was actually pretty impressed. Not just because they answered but the quality of the answer.

I won't copy paste that in its entirety here but I will say they did a full intangible asset explanation, including the tests it should pass and explained why the customer lists pass each and every test. They talk about repeat order customers being 25-40%, though this is masked as some of first time DTC customers subsequently buy from retail.

Then they talk about customer acquisition cost. Industry standard metrics are £12-15 per customer. Innovaderma (LON:IDP) capitalise at £3.50 p/c and given the level of repeat ordering say they could capitalise at a much higher level but choose to be prudent/conservative.

My take on this is that the accounting isn't aggressive at all, it is fine. Worries about impairment charges hitting future p&l are unfounded. It appears to me most unlikely that any significant impairment will occur given the asset is held at £3.50 p/c with a high re-order rate so I am comfortable they are not inflating profits at the expense of mortgaging the future.

Small Cap Value Report (Fri 8 Nov 2019) - Mello, IDP, GAW, CTR, CGS, SMT

Mello London

Innovaderma (LON:IDP)

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Graham Neary

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