Small Cap Value Report (Mon 12 Feb 2018) - GMD, SOS, IQE, RM2, LOK, PHD, UPGS

Monday, Feb 12 2018 by

Good morning!

Stocks on my radar today are (thanks for the suggestions):


Macro/portfolio view - the FTSE has been strong today, up 1.3%. I still think we are in for a period of extended volatility and probably some more big downward swings. As was pointed out on ZeroHedge last week, portfolio management models are going to have to be updated for the huge upswing in VIX (volatility) last week, which will make institutional investors more careful. Retail investors, too, are likely to be anxious in the immediate future.

I am trying to be disciplined, and dealing with the volatility by placing limit order bids for stocks I'm interested in at prices which I think are attractive. I put a bid in for Creightons (LON:CRL) last week, which somebody hit, so I now own a few shares in that company. At the other end of the market cap spectrum, I also own shares in British American Tobacco (LON:BATS), and have a bid under the market to try to buy more.

GAME Digital (LON:GMD)

  • Share price: 41.7p (+10%)
  • No. of shares: 171 million
  • Market cap: £71 million

Collaboration agreement and new borrowing facilities

GAME is the high street retailer which many of you are familiar with.

Sports Direct (i.e. Mike Ashley) already owned 26% of GAME, and now extends its involvement as follows:

The Collaboration Agreement covers the rollout of BELONG and GAME Retail Limited ("GAME Retail") stores, including plans to enter into concession agreements with Sports Direct, pursuant to which BELONG arenas and/or GAME Retail stores will be sited in selected Sports Direct locations.

BELONG is the e-sports brand which was developed by GAME.

Checking October 2017 figures, Sports Direct has 500 stores…

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All my own views. I am not regulated by the FSA. No advice.

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GAME Digital plc is a retailer of video games. The Company operates approximately 580 stores across the United Kingdom and Spain. The Company's segments include UK, Spain, and Events, Esports & Digital. Its UK and Spain segments are engaged in the sale of hardware, software, accessories and digital. Its Events, Esports & Digital businesses include SocialNAT and Ads Reality Limited (Ads Reality). The Company's activities include multichannel retailing and merchandising; supply chain management and distribution; software and technology development; marketing and customer relationship management (CRM); sourcing and procurement from suppliers, as well as range of individual customers; event management and production, and training, development and employee engagement. The Company's subsidiary undertakings include Game Retail Limited, Game Stores Iberia SLU, Multiplay (UK) Limited, Game Esports and Events Limited, and Game Digital Solutions Limited. more »

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Sosandar PLC, formerly Orogen PLC, is a United Kingdom-based company that operates an online women’s wear platform. The Company’s clothing categories include dresses, jackets and coats, knitwear, shirts and blouses, tops, skirts, trousers, jeans, leggings, footwear, leather and suede, occasion wear, work wear, autumn trends, velvet and holiday shop. Its footwear products include Pewter Metallic Chelsea Boot, Red Leather Ankle Boot, Velvet Cylinder Heel Ankle Boot, Black Leather Stud Detail Ankle Boot, Black Suede Closed Toe Mule, Grey Velvet Court Shoe With Jeweled Brooch, Black Suede And Pewter Metallic Court Shoe, Black Leather Front Zip Ankle Boot, Leopard Print Leather Chelsea Boot, Steel Blue Leather Snake Print Ankle Boot And Black Suede Knee Boot. It also offers latest edit of day-to-night dresses, on-trend separates, luxe leather and outfit-topping shoes through its platform. more »

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IQE plc is a United Kingdom-based holding company. The Company is engaged in the research, development and provision of engineering consultancy services to the compound semiconductor industry. The Company's segments include wireless, photonics, Infra Red and CMOS++. The Company is the manufacturer and supplier of Compound Semiconductor wafers or epiwafers using a process called epitaxy. Its photonics business enables a range of end applications, from data communications and advanced optical-fibers, to sensors in consumer and industrial applications. It operates through business units, including wireless, photonics, InfraRed, CPV (advanced solar), power switching, light emitting diodes (LEDs) and advanced electronics. It produces atomically engineered layers of crystalline materials containing a range of semiconductor materials, such as gallium, arsenic, aluminum, indium and phosphorous. The Company has operations in the United States, Asia and Europe. more »

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

80 Comments on this Article show/hide all

Zoiberg 12th Feb '18 61 of 80

In reply to post #314023

Paul reported on Quiz a few weeks ago and described it as having 'IPO indigestion' and sure enough the share price has been in steady decline until recently. When I compared the websites of Sosandar and Quiz I found Quiz to be much more appealing. It boasts strong growth (figures available!) and has outlets in Debenhams stores so its online growth has piggy-backed on their online presence. Also its offering for the larger lady is very attractively presented.For my money Quiz is the better option. My 20 something daughter is in agreement and she's the real expert!

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matylda 12th Feb '18 62 of 80

In reply to post #314198

Thanks re: Lok'n Store (LON:LOK) - I just can't work out if it's an investment opportunity of not.

Graham, thanks for covering, much appreciated.

Guess it's worth keeping an eye out for at 350p!

Blog: Briefed Up
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mojomogoz 12th Feb '18 63 of 80

In reply to post #314333

Hi nicobos

Some good comments - thanks. You keep good company as Paul feels somewhat similar to you in the 'there's something a bit more smelly here'. I had a thought of that too but maybe I got too excited and ignored that cautious thinking and wanted to see a great buy...and I could pay the price.

Here's my hunches:

1) There's is nothing fishy going on other than they got themselves overexcited for the IPO (who wouldn't TBH if you are taking your baby to market?):

2) Founded by current CEO in 1997, its real success story of opportunism and hard work...with some good experienced travellers along the way to offer advice and some capital assistance in private days.

3) The CEO and other board members own a heavy chunk of stock. Yes they made out in the IPO but some newer board members bought in post IPO (one very chunky £400k purchase). Now, CEO and operations guys would need to be real snakes to mislead to such a degree. Its possible, but the guys buying have real retail and business nouse. They are not lightweights.

4) Its probably B&M that have shifted the trade terms on them. B&M is growing and maturing. I guess they are systematically looking across the business to tighten up practices and push cost/risk onto suppliers as they muscle up with growth.

5) They supply a relatively small and not very core niche for their retailers when it comes to kitchen equipment. It'll never have great frontage in the stores and never much profile. I reckon sales will be quite lumpy. The target consumer client base (2/3rd of customer are discount retailers) are price conscious and many will have tight budgets. If you are hard up you might skip the new kettle as the old one still battles on...its not like you are kitchen party set (where I live in west London people throw parties with the intention obviously being to show off their fab new kitchen...yawn...I refuse to talk to anyone re houses or schools...I'd rather go to oblivion!). You just run with the skanky kettle for a bit longer and when you feel flush again you buy a new one. To me it makes sense that UPGS will be at the sharp end of consumer sentiment.

The next 6 months are potentially pretty dark for UP Global Sourcing Holdings (LON:UPGS) so the share price is likely to be unpredictable and volatile. Any positive noises from company will push up a lot and positive noises from UK retail will push up a bit. My guess is that UPGS's niche service can sustain margin decently through up and downs and make out really well in good times. I also guess that it is quite hard for customers to replace UPGS once they are in the door.

Time will tell. I am acutely aware that I could be missing something really hunch says no, just some hubris from mgt and unlucky environment.

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nicobos 12th Feb '18 64 of 80

In reply to post #314393

UP Global Sourcing Holdings (LON:UPGS)

Some fair points Lavinit,

I suppose it's one of those situations with a large asymmetry of information...I feel the management team will know a lot more than the average investor regarding how many skeletons are left in the closet!

The only logical course of action would be to follow their lead. If they believe the business is such a "bargain" at these prices then hopefully they'll put their hands in their pocket and start buying.
If they do so and buy a material amount (i.e. put back in some of their IPO cash!), this would be the sign to play follow my leader.

In fact, the more I think about it, the business has lost c.85% of its value … it would be crazy for them NOT to buy some of it back if they still believe in the long-term growth story!

Other points to note:

- the ‘technician’ in me would also want to make sure the chart has bottomed out first before rushing in. I’ve made the mistake previously of buying in too soon following a profit warning (see Connect (LON:CNCT) ).

- the chart now suffers from significant ‘overhead supply’ i.e. there will be a lot of people sitting on very large losses who will be selling into any rise, desperate to get their money back (hence the wait for a proper base to form … Minervini etc).

- Keep an eye on the fund investors that bought in with the IPO. Some may now effectively ‘write off’ their stake which means they could be looking to dump their last remaining holdings into the market. The drip drip effect of a fund selling down can keep the price depressed for a while (and the opportunity cost of holding may not make sense in a bull market [if we are still in one!?]).

Anyway, it’s on my watchlist and I’ll follow with interest from the side lines!

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Ben1 12th Feb '18 65 of 80

In reply to post #314233

Re Sosandar PR company's response that "We fully appreciate the want for visibility and context and are working on ways to address this."... This rather backs up the question someone raised earlier about the accounting systems. It reads like 'we think things are going well, but we don't really know'

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DJCP 12th Feb '18 66 of 80

In reply to post #314398

Re UP Global Sourcing Holdings (LON:UPGS)
Isn't there a saying about profit warnings coming in threes? For all those holding/buying, I hope not.

I was tempted after the last one, at just under 100p, but for some (unknown) reason, decided against it.

I am a sucker for falling-knives, so much so in the past, that I'm often tempted to set up a sub-folio called 'fingers' to contain all the debris from these punts.

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Graham Neary 13th Feb '18 67 of 80

In reply to post #314388

Hi matylda, thanks for recommending that I cover Lok'n Store (LON:LOK), I quite like it on initial review. As you say, it should be "low-risk", i.e. with REIT/property-like returns. Cheers. G

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Graham Neary 13th Feb '18 68 of 80

In reply to post #313998

Hi rustle

re: Proactis Holdings (LON:PHD)

Yes, it's a tricky one. Lots of moving parts. Worth watching all the same. Thanks for the suggestion. G

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Graham Neary 13th Feb '18 69 of 80

In reply to post #314013

Hi clarea, thanks for that re: UP Global Sourcing Holdings (LON:UPGS). G

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Graham Neary 13th Feb '18 70 of 80

In reply to post #314208

Thanks for the feedback andrea! G

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Graham Neary 13th Feb '18 71 of 80

In reply to post #313938

Hi mercury,

re: Saga (LON:SAGA)

Thanks for the recommendation but as others have said, we tend to stick with small-caps in this report except when there are particular reasons to cover something bigger. Cheers.

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Paul Scott 13th Feb '18 72 of 80

Thinking about some comments above - QUIZ (LON:QUIZ) - hmmm,quite interesting. But to my mind, I don't see anything exceptional there. The online element of the business is small. Good rag traders, but is this share likely to be a 10-bagger from here? Very unlikely,in my view. Quiz might be a 2-bagger from here, but only after it's digested what was probably a degree of over-valuation at IPO?

Whereas I see more flair with Sosandar, and I think it could more easily be a 10-bagger from here. That's why I think it's interesting. Not really something you can measure with PERs, etc.

Anyway, time will tell. For me, SOS is a 2-5 year thing, so the current share price doesn't matter to me. If anything, I'd like it to be a bit lower. Better to have a steady progression up, than see it spiking up & then having to worry about whether to top-slice or not. Let's just relax, and see what the figures look like this year & next year. There's no rush,

Regards, Paul.

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Paul Scott 13th Feb '18 73 of 80

In reply to post #314418

Hi Ben1,

Re Sosandar PR company's response that "We fully appreciate the want for visibility and context and are working on ways to address this."... This rather backs up the question someone raised earlier about the accounting systems. It reads like 'we think things are going well, but we don't really know'

If you read the Admission Document, then you'll discover that SOS uses off-the-shelf software called Magento, which is linked to third-party fulfilment by a well-known company called Clipper. It's worth reading Admission Documents generally, as they explain the business model.

Being an online business, using real-time software, SOS management will have real-time information on sales.


P.S. In my experience, the PR company generally won't have a clue about how the business works. So best ignored.

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gus 1065 13th Feb '18 74 of 80

In reply to post #314388

Hi matylda.

If you’re looking at personal self-storage providers, it may be worth considering/comparing Lok'n Store (LON:LOK) to the Safestore Holdings (LON:SAFE) REIT. A case can be made for either investment but on balance I prefer (and have been a holder for a while of) the latter.


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Ben1 13th Feb '18 75 of 80

In reply to post #314503

Thanks for the reply Paul. I haven't done much research on SOS, not read the Admission Document and not invested. I just thought the response didn't read very well. I expect your right and the problem lies with the PR company rather than SOS

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clarea 13th Feb '18 76 of 80

In reply to post #314483

Hi Graham,

Rather than limit orders have you thought of opening an account with IG Index where you can have direct market access and put your own bid's onto the exchange directly ?

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Graham Neary 13th Feb '18 77 of 80

In reply to post #314878

Hi clarea, I do have an account with DMA access, and should probably use it more! Good point. G

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cig 14th Feb '18 78 of 80

In reply to post #313993

GAME may not be in a position to keep the remaining half of the cake given how entangled they now are...

(I sold.)

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Wimbledonsprinter 14th Feb '18 79 of 80

In reply to post #314293


That is a good point but I don't think that the customer can be B&M - as B&M would be classified as a UK retailer. UP Global Sourcing Holdings (LON:UPGS) is clear that the customer is a European customer and for UP Global Sourcing the UK and Europe are two different things (at least when it comes to customer definition). I understand that the second largest client of UP Global Sourcing Holdings (LON:UPGS) is Action (which would presumably count as a European retailer - and the second largest client of UPGS accounted for around 10% of sales according to the prospectus (in other words in the order of magnitude of £10 million). But how moving this level of sales from "FOB" to "landed" can delay revenues by £4-5 million is beyond me (shipping times are just not that long).

Still I generally agree with your view that there is an interesting risk-reward here - particularly if we can put some faith in the management's £6-7million FY18 EBITDA forecast - and if we believe operating cash flow is similar.

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ISAallowance 14th Feb '18 80 of 80

In reply to post #316608

B&M are headquartered in Luxembourg, and are growing a chain in Germany under the Jowell brand, so could conceivably be classed as European.

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 Are LON:GMD's fundamentals sound as an investment? Find out More »

About Graham Neary

Graham Neary

Full-time investor and independent analyst. Editor at Cube.Investments, small-cap writer at Stockopedia. Previously a fixed income analyst in the City and institutional fund manager. I'm a CFA charterholder and have the Investment Management Certificate and STA Diploma in Technical Analysis for good measure. When I'm not talking about finance, I enjoy recreational poker, chess and Mandarin Chinese. more »


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