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

Monday, Feb 12 2018 by
79

Good morning!

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

Cheers!


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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Disclaimer:  

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 »

LSE Price
29.75p
Change
 
Mkt Cap (£m)
52.6
P/E (fwd)
n/a
Yield (fwd)
n/a

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 »

LSE Price
13.01p
Change
-1.8%
Mkt Cap (£m)
21.6
P/E (fwd)
n/a
Yield (fwd)
n/a

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 »

LSE Price
57.5p
Change
4.2%
Mkt Cap (£m)
437.6
P/E (fwd)
28.2
Yield (fwd)
n/a



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


80 Comments on this Article show/hide all

mercury61 12th Feb '18 This post is under review
21

I see IQE (LON:IQE) isn't quite small cap either?!

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seadoc 12th Feb '18 22 of 80
20

In reply to post #314063

I see IQE (LON:IQE) isn't quite small cap either?!

Might depend what KPMG find when they turn over a few of the moss covered rocks.

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timarr 12th Feb '18 23 of 80
16

In reply to post #314053

No apologies required.

We keep asking Graham and Paul to add the company criteria to the header ... but roughly £600 million is the cutoff with exceptions made for stocks that have attracted lots of commentary on the way up - such as Boohoo.Com (LON:BOO) or IQE (LON:IQE) - and for anything Paul or Graham take a fancy to.

People get irritated when new posters "ignore" these rules, but frankly unless they're made clear it will continue to happen. Understandably.

timarr

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abtan 12th Feb '18 24 of 80

Interested in thoughts on UP Global Sourcing Holdings (LON:UPGS)

A 2nd profit warning since the IPO would usually put me off, but significant director buying and the fact that it's still cash profitable (and dividend appears to be well covered) makes me wonder whether the drop has been overdone. FCF should be at least £5m which looks good value for a company valued at c £35m.

Also interested in GAME Digital (LON:GMD) (I hold)

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gus 1065 12th Feb '18 25 of 80
6

In reply to post #314003

Hi daveinthelakes.

Re. GAME Digital (LON:GMD) , I agree it seems odd to have £50m in cash while taking a loan from Mike Ashley and selling a 50% share in the e-sport venture for peanuts. I suspect (as ever with Mr Ashley) there is more to this than meets the eye. Bear in mind that Mr. A already owns 26% of GAME Digital (LON:GMD) and Elliott Capital, with a further 38%, appear to be selling down and may be a “loose” holder prepared to sell their stake. At a take out price of say 60p per share, this 38% would cost say £40m - small beer, especially if Ashley completes on his sale of Newcastle FC - giving Ashley 64% of the company (and potentially triggering a full take over).

Likewise, for GAME Digital (LON:GMD) in the past year they’ve rolled out 19 e-sport venues - steady but not spectacular progress. Sports Direct has over 700 stores nationwide. Not all of these will be suitable, but they’re pretty much on every high street in pretty large warehouse type venues that could readily be converted to e-sport use. Given GAME Digital (LON:GMD) ‘s small scale and accident prone history, the chance to pony up with a substantial strategic partner/shareholder (who may well in due course take them over) via a payment of £3.2m cash plus a non-recourse loan in the JV (emphasis on the non-recourse so GAME Digital (LON:GMD) is effectively farming out much of the risk on the e-sports roll out) is possibly too good to miss. It may all end in tears, but it will be interesting. Market seems quite happy with the GAME Digital (LON:GMD) shares up about 12% at the moment.

Gus.

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mojomogoz 12th Feb '18 26 of 80

In reply to post #314058

Hi, what is SCSW?

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bsharman 12th Feb '18 27 of 80
3

In reply to post #313993

I would agree RE : GAME Digital (LON:GMD)

on the face of it, it looks like Sports Direct have a fantastic deal in terms of the £ paid for 50% of the profits however GAME are getting access to prime trading locations on the cheap. Yes they are giving away 50% of the cake but it's now a much bigger cake and it will all happen much faster allowing them to dominate the market. I would like to read the details of the contract though! I wonder if GAME Digital (LON:GMD) consulted with Elliot (their biggest shareholder) beforehand ?

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James RH 12th Feb '18 28 of 80
1

In reply to post #314103

Small Company Sharewatch

http://www.scsw.co.uk

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mojomogoz 12th Feb '18 29 of 80

In reply to post #314118

Thanks

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FREng 12th Feb '18 30 of 80
1

The TU from Pennant International (LON:PEN) today is "in line" but contains interesting detail on the effect of IFRS15: "The anticipated net effect of Pennant adopting IFRS15 (taking into account the Opening Adjustment and the later recognition of revenue and profit) is a positive adjustment to revenue and EBITA for FY 2018 of 2 million and 1 million respectively".

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tic_tac_toe 12th Feb '18 31 of 80
2

In reply to post #314123

SCSW : long term record = good, some picks really stink

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Camtab 12th Feb '18 32 of 80
1

Clearly without the details it is hard to offer any certainty but it seems to me the price tag is fairly insignificant given the reach and opportunity to remove costs in the way of leases and administration of finding new ones. My son who is 11 loves sports direct and video games, am already blaching at future trips to Sports Direct. Not an Ashley fan, he will have bargained hard but for what it is worth I think this is a real win for GMD.

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runthejoules 12th Feb '18 33 of 80

In reply to post #314103

SCSW a monthly tipsheet - has done well over long-term but recently has slipped up with UP Global Sourcing Holdings (LON:UPGS) , Luceco (LON:LUCE) Falanx (LON:FLX) etc. A tip from them saw GAME Digital (LON:GMD) shoot to 62p (where I should have sold & rebought lower!)

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mojomogoz 12th Feb '18 34 of 80
9

In reply to post #314133

Thanks. I just checked the site and its a subscription tip sheet....so, I won't be following...why pay to follow recommendations of someone else when I can lose money on my own work and recommendations :)

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Gromley 12th Feb '18 35 of 80
1

In reply to post #314098

I think GAME Digital (LON:GMD) 's £50m cash is a bit of a myth, I believe it is very much lower at other times in the annual cycle. Nevertheless they set up a substantial debt facility only a few months ago, so it is not totally clear why they need this loan (unless it is maybe on better terms).

Access to Sport's Directs locations is certainly a big benefit and I can see the case to say that giving away 50% of the cake to ensure deliver could justify the price.

Someone over on advfn however made an interesting observation -  could this deal by why the FD left?


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Trident 12th Feb '18 36 of 80
2

Strange thing about UP Global Sourcing Holdings (LON:UPGS) is that two non-execs (Chairman + 1 other, I believe) each bought a serious tranche of shares to put in their pensions etc. Which would usually be a buy signal of sorts.

I am sure they can afford it, but I would be seriously hacked off if I were them. Perhaps the CEO is a bit of a Pollyanna, and keeps telling everyone its going to be great, and they buy it?

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daveinthelakes 12th Feb '18 37 of 80
1

In reply to post #314098

Hi Gus,

Thanks. Don't disagree with your or Gromley's (post 35) views.

As a holder I am happy with the involvement of Sports Direct just think the loan is a bit of a smokescreen to justify Ashley picking up the Belong profits on the cheap.

I think shareholders should have details of the arrangements for any Belong outlets moving into SD stores. I fear this is a way for Ashley to acquire the whole of GAME Digital (LON:GMD) at less than full value.

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rmillaree 12th Feb '18 38 of 80

In reply to post #314048

croasdalelfc ref (UPGS)

Excellent post croasdalelfc - i guess the trick is to "not" give the company the benefit of the doubt, its a plain fact that its normally in the interests of the company and its owners to squeeze as much out of any flotation as they can, so i am guessing its always going to be glass chokka full rather than a glass 3/4's empty(followed by later upgrades in earnings forecasts) leaving plenty of space for the company to prove itself in the next couple of years.

Having said that I looked at the Hotel Chocolat admission document a while back and it did all seem full of extra rosy numbers in the short term - and i didn't buy and the shareprice there has doubled so i guess any generalisation in this regard is is likely to backfire from time to time.

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JohnEustace 12th Feb '18 39 of 80
4

In reply to post #314158

Does anyone know who the major UP Global Sourcing Holdings (LON:UPGS) customer is?
They say they took a £4m to £5m impact on a switch in Incoterms from FOB to Landed for a major customer. I guesstimate that as six weeks worth of business, allowing for port handling and ship sailing times from the Far East to Europe. So taking the midpoint and saying the hit was £4.5m that customer represents £750k per week or £39m per annum out of what would have been £52m before the hit, so roughly 75% of their business.

Pure speculation on my part here, but if that's Sainsbury's who just took over Argos that could fit?

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bsharman 12th Feb '18 40 of 80
2

GAME Digital (LON:GMD)

Morning. I think you make a good point that Sport Direct are dominating proceedings and perhaps this is related to why the Financial Director left not that long ago? I'm a shareholder of GAME Digital (LON:GMD) and i'm a little perplexed at this deal. I would have liked to have seen a 50/50 spit of the cost of funding new Belong sites if the profit is going to be split 50/50.... I am finding it very difficult to predict how this is going to play out in the future - but with 'Mad Mike' a significant shareholder - both sides will want it to be successful. Perhaps in the future we will have a 'Premier League' for gaming whereby cities compete against each other and the winning teams go on to play the European Champions, all streamed online and tickets sold to the 'games'?
Here is an interesting article about esports: https://venturebeat.com/2018/02/12/booming-business-of-esports-sets-sights-on-conquering-mainstream-audiences/

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About Graham Neary

Graham Neary

Full-time investor and independent analyst. Prior to this, I spent seven years in the financial markets as an analyst and institutional fund manager. I'm CFA-qualified, also holding the Investment Management Certificate and the STA Diploma in Technical Analysis.Away from finance, my main interests are recreational poker and everything to do with China, especially Mandarin Chinese. more »

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