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…

Unlock this article instantly by logging into your account

Don’t have an account? Register for free and we’ll get out your way


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

Do you like this Post?
79 thumbs up
0 thumbs down
Share this post with friends

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
Mkt Cap (£m)
P/E (fwd)
Yield (fwd)

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
Mkt Cap (£m)
P/E (fwd)
Yield (fwd)

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
Mkt Cap (£m)
P/E (fwd)
Yield (fwd)

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

80 Comments on this Article show/hide all

runthejoules 12th Feb '18 41 of 80

Just an esports aside but I would have expected Gfinity (LON:GFIN) shares to be down on the GAME Digital (LON:GMD) news, but they're up 4% so looks like the market thinks there is room enough for two UK esports leagues?

| Link | Share
whitepjs 12th Feb '18 42 of 80

In reply to post #313973


I was also confused by Lok'n Store (LON:LOK) . I couldn't understand the reason for the high PE.

I also looked at the £4.16ps NAV figures and couldn't work out why the 'adjusted' NAV was excluding the Deferred Tax liability of £16mn. I see why they are including a true rather than book valuation for their assets, but why then exclude the tax liability arising from this valuation uplift. They describe the £16mn as:

The deferred tax provision which is calculated at forward corporation tax
rates of 17% and is substantially a tax provision against the potential
crystallisation (sales) of revalued properties and past ‘rolled over’
gains amounts to £16.4 million.

If you include that liability, you then get something closer to £3.50ps NAV i.e.13% premium.  So with a high PE and no obvious (to me) discount to NAV, I'm not convinced by it.  Also, if you look at Safestore, Stocko's graphics seem to like that much more....


| Link | Share | 1 reply
andrea34l 12th Feb '18 43 of 80

I thought the following was your most interesting comment on GAME Digital (LON:GMD) Graham and one I share:

Will people want to buy or play video games inside Sports Direct stores? I am trying to picture it, but I'm not sure.

In my mind it is like going to Tesco and wanting to buy bags of cement mix or fence posts. Surely people want to go to Sports Direct stores solely to buy sports equipment...

Re. Sosandar (LON:SOS) which I hold, the statement sounds positive... but there are absolutely no numbers mentioned whatsoever. Just what were the management expectations... :-/

IQE (LON:IQE) seem to be going all guns blazing with a plethora of announcements. I just cannot persuade myself to invest, I know a lot of the price is about the future... but until this is substantiated, the scope of profit increase becomes clearer for me, and the assortment of shorting attacks subsides, then I consider there is too much risk for me.

| Link | Share | 1 reply
Carcosa 12th Feb '18 44 of 80

I emailed Sosandar (LON:SOS) PR company today looking for clarification regarding quantfying the phrase 'management expectations'. Full marks for a rapid reply but the content was "We fully appreciate the want for visibility and context and are working on ways to address this."...

| Link | Share | 2 replies
StandardModel 12th Feb '18 45 of 80

GAME Digital (LON:GMD) all my opinion and a holder

Positives are that BELONG is strengthened significantly. At this early stage of these gaming locations being rolled out (along with GFIN & others) it's all about getting market share, whoever wins that battle now wins in the longterm. The Sports Direct deal gives GMD the distribution (most importantly) and the resources to have a quality product (they specifically mention the website in the RNS which they should as it is terrible). So good for BELONG as a franchise. So good in fact that it might explain the seemingly low £3m odd GMD received in that I see it as a payment on top of the access to Sports Direct stores.

Negatives - looks like GMD have sold their soul to the devil in order to give life to BELONG (all this in the context of illustrating the situation and nothing in fact against Mr Ashley). BELONG should do well but it won't help GMD as much as it should have/ could have. For me this moves the trade from bring fundamentals based (net cash for GMD) to a story based one. Hopefully - as I hold - this addresses the FD leaving issue as being about him not liking the deal as opposed to anything dodgy on the accounts front (again, hopefully).

| Link | Share
mojomogoz 12th Feb '18 46 of 80

UP Global Sourcing Holdings (LON:UPGS) act in haste and repent in leisure....will that be me?

I've followed the UPGS story for a little bit now without getting into the company in any detail. Today's warning and share price fall made me do some quick work. Conclusion = I bought the stock. This seems a near no brainer bargain.

There is a lot that is specifically wrong in the short term as reflected in share price falls following updates. The immediate visibility is not good. So why buy?...

In some respects this is an IP business. Not in terms of patents etc obvs but connections and knowhow. It sells through lots of different retailers particularly discounters. These guys are not going to want to take on the sourcing and supply management headaches that UPGS do for items that are very much non-core....being non-core is not a threat either as cos like Sainsburys will always carry kitchenware stuff.

Overtime they will lose and gain customers. They will also lose and gain brands. This is not that important as they provide the connection and knowhow in the middle to source goods. At a grand macro picture perspective there is some risk in sourcing from China. I am of the view that we are in a many year period of the decline of the $ as the global hegemonic currency. This has implications for sourcing from China (not simple though as if RMB cost of inputs falls as they are $ priced then that saving can be passed on). However, UPGS can adapt by sourcing elsewhere. Plus, this macro is likely be mid to long term relative to the short term opp in UPGS shares.

Costs appear well managed.

Who knows what happens on the dividend at >10% now. Maybe they squeeze to carry on paying it (nice payout to big internal holders of stock!). Maybe they cut it. I really don't care at this price.

The stock is now like an out of the money option. There could be downside but should be quite cushioned (unless their bankruptcy that I have not been able to see). However, the upside to stabilisation or trading upside is multibagging high...and then it may continue to grow some. Unlikely to be a mega grower unless they break USA or something like that but can be decent up to 10% for many years. Germany is great market to get in to. In many ways less sophisticated than UK retail and the consumer is too.

Sentiment is obvs totally toilet as they are recent IPO gone bad. Maybe there's some shenanigans in that from mgt but there's decent odds the environment turned on them and no abuse of new shareholders intended. They have been very aggressive and ambitious in how they develop since inception 20 years ago. I fancy that the management are very competent and committed. The board looks good and useful.

Eyes closed, fingers crossed.

| Link | Share | 1 reply
pka 12th Feb '18 47 of 80

Graham, Thanks for your views on IQE. You wrote: "I think that puts to bed the idea that relations with Cardiff University have broken down or are going to break down. It could still happen, but there is no evidence for it."

I agree with that and also with a poster on ADVFN called Mad Foetus, who wrote today:

"The downside risk appears to be that IQE may have got an unfairly good deal from Cardiff uni. I don't see why this is a problem."

| Link | Share
Andrew L 12th Feb '18 48 of 80

Sosandar (LON:SOS) - This company is hard to call. Lots of PR in newspapers and a fair bit of hype. The updates the company have given are very vague. This is not reassuring. The company has a value of £18m and may have generated about £1m of revenue in the year to March 2018.

| Link | Share
JohnEustace 12th Feb '18 49 of 80

In reply to post #314178

Oops - spotted my error. The £52m was half year turnover not full year, so the major UP Global Sourcing Holdings (LON:UPGS) customer would be approx 37.5% of their business, not 75%

| Link | Share | 1 reply
Edward John Canham 12th Feb '18 50 of 80

In reply to post #314233

Probably better if they hadn't replied. Implies Sosandar (LON:SOS) doesn't have a reliable accounting system - reporting some sales numbers is not difficult.


| Link | Share
Paul Scott 12th Feb '18 51 of 80


GAME Digital (LON:GMD) deal with Sports Direct - (I hold) - am scratching my head to understand whether this is a good deal or not. My initial reaction is that GMD seems to have given away half the upside on the most exciting part of the business. However, it needs to be seen in the context of c.80% of GMD's shop leases expiring in 2018. Therefore a deal which could potentially give it loads of new space, in many locations, and at probably very low rents, in Sports Direct stores, does seem a neat solution. That's far better (and cheaper) than negotiating on hundreds of new standalone sites simultaneously, which also would have been almost impossible for GMD to manage, without taking on loads of additional property managers.

I think it looks fairly likely that Mad Mike could launch a takeover bid for GMD, if the JV does well.

Sosandar (LON:SOS) - trading update - (I hold) - this is reassuring, but as others have said, with no figures, it is of limited value. This company is tiny, really little more than a start-up. However, I think it has the right ingredients to be potentially a big winner, in the long term. Time will tell! Speculative, but it has plenty of cash. I've bought some more today.

UP Global Sourcing Holdings (LON:UPGS) - (I hold) - this is starting to look interesting, in my view. The whole thing stinks, obviously, as others have mentioned. However, the market cap is now only £28m, at 34p per share, and its balance sheet looks OK to me. Forecast of £6-7m EBITDA in a bad year, makes it look cheap. Also the company confirms its dividend policy today. Directors own 44.1%, so are clearly incentivised to put things right. I don't find their explanations about retailer sentiment as being convincing at all. I suspect the real reason(s) for things going wrong have not been disclosed.  So it feels a bit risky. Hence why I've not taken a big position here, just smallish for now.

Regards, Paul.

| Link | Share
mojomogoz 12th Feb '18 52 of 80

In reply to post #314273

Hi John, it can't be Sainsbury's as they are not discount retail and approx 65% of customer base is discount.

Top two customers 32% of business pre IPO with B&M biggest at 22%. That said from FY16 to FY17 there was high growth in revenue.

From FY17 results: " growth in sales to discounters in the UK and in Europe (up 64.6 % to 63.8 m)". So if your arithmetic on implied shipping times etc is right means B&M could be the candidate. That said, I'm not sure on your arithmetic and need to think about it.

Main retailers from FY17: "increased sales to the main UK supermarkets (up 95.0 % to 10.3 m)"

| Link | Share | 1 reply
purpleski 12th Feb '18 53 of 80

In reply to post #314018

Hi Mercury61

The thumbs down are not personal but just an indication of people’s opinion of the request. Generally most here don't want Paul and Graham’s opinion on large caps. Hence the thumbs down.

There is a sentiment here that the SCVR should only discuss (i.e. not mention Brexit, macro, politics, large cap, mid cap etc) within the remit described in the title. Personally I would read anything that, and almost certainly learn from, Graham or Paul wrote whether it be accounting, analysis, opinion on the macro environment large cap shares (Paul on Boohoo.Com (LON:BOO) anyone, Paul on retail generally for example).

But people seem to feel that these other areas be discussed elsewhere.

My hope is that the guys at Stockopedia may at some point (though they are I believe very busy with the new site) might address this with another column by a respected investor to cover large caps or a topics generally perhaps once a week as is done over at Sharescope)

Best wishes

PS I certainly think the thumbs should be anonymous. 

| Link | Share
purpleski 12th Feb '18 54 of 80

In reply to post #314063

Hi mercury61

Not sure why anybody would report your comment for disruptive behaviour but for what is worth I have learn that the best thing is to follow the lead of Paul and Graham. So for example if Paul writes about Debenhams (LON:DEB) (or IQE (LON:IQE) :-)) or something more macro (market turmoil as he or Graham, cannot remember which, did last week) then it is generally tolerated by most, through not all, to comment on that subject.

Aside from that it is best to only request discussion on small caps.

best wishes


| Link | Share
runthejoules 12th Feb '18 55 of 80


| Link | Share
nicobos 12th Feb '18 56 of 80

In reply to post #314253

UP Global Sourcing Holdings (LON:UPGS) has now issued two profit warnings and effectively lost almost 50% of EBITDA in a year! Not the first thing you look for in an investable business.

I would be tempted to take a small piece (especially with a c.15% dividend) but find it impossible to deduce the real reason for the profit warnings and whether this is likely to be a one-off or not !? Certainly, if profitability can drop by such a large % so quickly, what's to stop it falling further?

Clearly UP Global Sourcing Holdings (LON:UPGS) 's market positioning is not as strong as they would have you believe at the time of the IPO.

Some of the reasons given are:

- "ongoing challenges in the general merchandise retail market and the resulting continued caution from customers on placing orders"

Well, with pressure on discretionary income, the rise of internet retailing and wage / rent / rates inflation, I don't see the challenges in the general retail market abating any time soon. I would assume there would be continued caution from customers.

- "the one-off impact of approximately GBP4.0m - GBP5.0m of revenue as a result of the move from free on board to landed arrangements with a key European customer."

So only c.5% of revenue - doesn't sound like a disaster. What was the profit impact on this revenue loss? How much customer concentration is there in this business? and are there any other "moves" in the pipeline?

- In addition, it should be noted that H1 2017 was an unusually strong period for the Group due to highly positive retailer sentiment (62% of FY revenue was delivered in H1 2017, as opposed to 53% and 54% in FY 2016 and FY 2015, respectively)

So basically last year's strong revenue was a one off ? and hence unlikely to be repeated any time soon?

They seem to be relying on international growth in Germany to bail them out but there are some major questions over the core business which make it more of a 'punt' IMHO to buy in now. My guess is the first point on 'retailer caution' is the prime suspect for the deterioration. That doesn't fill me with confidence given the ongoing pressure on retailers and that they're seemingly being 'squeezed' by their customers.

Those who bought in at the last profit warning probably thought they were getting a bargain also!

Re GAME Digital (LON:GMD), the partnership seems to make sense if Ashley is giving them access to his stores in exchange for a share in the upside. Could work for both parties?

I've made the point before but the cash they hold is required for working capital (stock build up pre xmas and creditor unwind post-xmas) i.e. they need it to keep on functioning as a group. Otherwise why not distribute it as a special divi to shareholders!

The greater prize is that a slimmed down estate should unwind some of this cash balance which can then be either used for further investment (if ROCI can be generated) or otherwise returned to shareholders in due course.

| Link | Share | 1 reply
stockscreen 12th Feb '18 57 of 80

Poor old IQE. The rather stiff announcement by Cardiff seems to miss the point for both IQE and Cardiff University, that the JV has the potential to bring enormous benefits to both parties and to UK PLC. Its certainly a strength for IQE. Let's hope IQE gets more onto the front foot, with more detail on its products and customers, with its March results announcement.

| Link | Share
ridavies 12th Feb '18 58 of 80

In reply to post #314148

SCSW history is impressive. Not expensive and adds another dimension to small company share analysis to the great one provided here - which I also pay for, and I assume you do too!
All the best,

| Link | Share | 1 reply
Trident 12th Feb '18 59 of 80

Proactis Holdings (LON:PHD)

I hope the adjusted EBITDA doesn't end up like the proverbial sweepings under the carpet, that can take place when mergers etc occur.

Non-recurring admin costs is quite a broad statement. More traditionally used be called 'exceptional expenses'
- save in some companies, exceptional can mean 'annual exceptional expenses'.

As Graham says the accounts may give more clarity. One of the truth tests is cash generation

I was always excited by the potential that has been trailed by Proactis Holdings (LON:PHD) about selling on procurement licences to their clients user base, and the CEO raised this possibility again in his comments on the statement. But we haven't
seen many stats on this, and how much of a dream or a reality it really is. If it worked it worked be a significant profit generator...IF

Fingers crossed

| Link | Share
mojomogoz 12th Feb '18 60 of 80

In reply to post #314353

I pay for the stock data....only recently have I started reading some of the content particularly the SCVR. SCVR is very good and so are other posts and comments by users like yourself. I assume SCSW cannot match SCVR for breadth of coverage nor do you get all the great reader comments?

SCSW may indeed be good but unless it offers more than a view on a few stocks I wont pay for an I hardly ever can follow what someone else says about a stock as always got to lose my money my way... Doh!....that can be to my disadvantage as I can miss out on good insight but I benefit from being early to my own ideas and in not being very correlated to others. That said, as I now read SCVR most days and many of the comments I am worried that I am getting sucked into the crowd....

I even bought some Sosandar (LON:SOS) on its pullback on the recent market wobbles! I might need to have a good look at myself about that. My only piece of value adding research was to look on their Facebook page and it seems to me that they have decent follow for such an early company and some good interaction (and Facebook should be a key social media for them...just as the app is for Boohoo.Com (LON:BOO) given relative demographics. With their coverage and profile elsewhere they should at least achieve some decent early top line growth. My hunch, leaning on Paul, is that they have a niche and an approach/style that can resonate with a segment of women that somewhat lacks exciting service. Hopefully a little risked following Paul's perspective turns into a meaningful and handy leg in for a business that proves out in another few years.


| Link | Share

Please subscribe to submit a comment

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

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 »


Stock Picking Tutorial Centre

Let’s get you setup so you get the most out of our service
Done, Let's add some stocks
Brilliant - You've created a folio! Now let's add some stocks to it.

  • Apple (AAPL)

  • Shell (RDSA)

  • Twitter (TWTR)

  • Volkswagon AG (VOK)

  • McDonalds (MCD)

  • Vodafone (VOD)

  • Barratt Homes (BDEV)

  • Microsoft (MSFT)

  • Tesco (TSCO)
Save and show me my analysis