Small Cap Value Report (Mon 12 Mar 2018) - ESC, EVE, MGP, SEE

12th Mar '18 by Graham Neary

47 comments 15363 reads

Good morning! Thanks for your suggestions so far - they are a big help in deciding where to focus.

At the moment, I'm planning to write about the following:

Escape Hunt (LON:ESC)
eve Sleep (LON:EVE)
Medica (LON:MGP)
Seeing Machines (LON:SEE)

In big-cap news, the hostile approach by Melrose Industries (LON:MRO) for GKN (LON:GKN) has seen publication of an "increased and final offer" which is worth a look, considering the importance of these companies.

Escape Hunt (LON:ESC)

Share price: 113.5p (unch.)
No. of shares: 20.3 million
Market cap: £23 million

Trading Statement

I've been familiarising myself with this company, which offers live game experiences at various locations around the world.

The premise sounds unusual. You and your friends (or work colleagues) get locked in a room for an hour! Or as long as it takes you to escape, solving a variety of puzzles.

Some people believe that we are in a long-term trend towards consumer spending on experiences, rather than material goods. This certainly falls into the former category, so would be a good example of how invest in that trend.

This stock came into being through a company previously trading under the DAR ticker buying up the holding company Experiential Ventures Ltd for £12 million in May 2017. That was on a cash-free and debt-free basis. The Placing which took place to fund this deal raised an addition £3.6 million, more than it needed to, to help fund growth.

The Interim results to June 2017 aren't very useful considering the deal took place only two months prior. Full-year results to December 2017 will be published in April.

At the time of the deal, Escape Hunt had 214 escape rooms in 20 countries.

According to the Readmission Document, Experiential Ventures is domiciled in the Seychelles, with subsidiaries domiciled in Malaysia and Thailand. It made pre-tax profits of £115k in 2015 and £320k in 2016, from revenues of £600k and £1.1 million respectively.

Strangely, the company paid out nearly £500k of dividends in both of those years. The document says:

The declaration of dividends was based…

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matylda

12th Mar '18

Graham, thanks for Medica (LON:MGP) - Much appreciated. I am tempted to have a nibble!

Graham Neary

No probs mate!

Vsihv

This would be my 3rd reply - looks like stocko or the www don't want to play ball.
Others were more long winded - not sure if people can see them - wholly agree Tony and I would be tempted if I was not already sitting on paper losses!

Ditto - Thanks Graham - more sanguine by the minute over here!

Graham - Re: Seeing Machines (LON:SEE) - I would believe that if it was ever worth that much £50m - It would be dead in the water - Perhaps not!

jonesj

Ref Medica (LON:MGP)

There are studies showing software is way more reliable than doctors at correctly diagnosing lung diseases from X-rays.
I would think the same rules would apply for radiography.

However, as far as I can tell, Medica have consultants working remotely & I could not see any reference to software doing the diagnosis, or assisting with it. I would think that should eventually lead to cost reduction opportunities for Medica, or alternatively a lower cost competitor adopting such software & eating their lunch.

Any sensibly managed health provider would adopt such software, which would cut labour costs and free up more consultant time for dealing with patients.

That's an obvious way forward for the UK healthcare system, but for structural reasons, I doubt it has the competitive pressure to force innovation.

re: Escape Hunt (LON:ESC)

No obvious moat, you're probably right. Maybe we can compare escape rooms to theme parks, another type of entertainment experience for consumers? Most theme parks are generic, but you also have Disney theme parks with extra pricing power. Granted that Disney has an awful lot of IP backing it up. Maybe there is the possibility that a group of escape rooms could also have a valuable brand name?

Hi Gus - re: Escape Hunt (LON:ESC). Bit of a mixed bag there alright. Booker did very well! G

Hi DJCP - thanks for mentioning the AJ Bell IPO plans. I'll keep it on my radar. Cheers. G

davidjhill

hi Graham - as much as I generally like your analysis I think you are missing the point on Seeing Machines (LON:SEE)

The R&D (and thus losses) has indeed been huge but also provides a massive moat going forward. Anyone else is miles behind.
When you throw in the fact that for a car manufacturer to achieve a new 5* NCAP safety rating you MUST now have autonomous driver monitoring (and that is basically Seeing Machines (LON:SEE) ) you can start to get a very different valuation.
Taken alongside the tier 1 automotive supplier contract starting in 2019 and OEM contracts being close to completed the company revenue projections go almost exponential, rising by 600% out to 2019.

Assuming those numbers are not "pie in the sky" (and as sceptical as I first was it appears that they seem not to be) then £50m is far too low a valuation / anchor point given the 24 month growth period. The results were in line with those projections too.

NB : Mobileye, nearest equiv, was sold at 42* Sales which, extrapolated to this years revenues works out around £950m market cap equiv. (not that I am countenancing this as a price point in any way you understand - merely to point out the potential value disparity/spread, not to mention the difficulty of valuing it accurately)

Gromley

Hi Graham, I'm late to the party today, but "no discernable moat" was front and centre in my thinking about Escape Hunt (LON:ESC). I can probably go one better than Kenobi's example and say that I've run very similar activities for my Explorer Scouts on a Friday night for an outlay of little more than a few nick-nacks from poundland - I'll admit that the level of sophistication was not the same and there was absolutely no Trade Marked content (certainly not, how dare anyone suggest that , any similarity to anything whatsoever was entirely coincidental!)

I can see your point about the comparison with theme parks , but the level of capex and payback are vastly different.

Incidentally I read an eye opening article a couple of days ago (can't find the link now) about just how ephemeral theme parks can be (anyone remember Cricket St Thomas - blobby blobby blobby?)

I do think that the concept of Escape rooms (and the broader "live fantasy" interactives ) does have some legs, but I just don't see how anyone can corner the market.

That said, I'll own up to dismissing several "megatrends" in their infancy, so no one should pay to much attention to me on such matters! But I do think potential investors need to consider differentiation and longevity here.

gus 1065

13th Mar '18

Hi Gromley.

Is this the article about theme parks you mentioned?

http://www.bbc.co.uk/news/uk-england-43289004

Who says nostalgia ain’t what it used to be?

Gus.

Thanks gus - yes that was the one!

Hi David, thanks for the insight into Seeing Machines (LON:SEE). I am new to the company. G

No problem. There is actually a really good 32 page research note from FinnCap on Research-Tree I'd recommend if you are interested. Woke me up from my "jam tomorrow" slumber with a bit of a start. At the time I reckoned they'd need one more round of financing and that was duly done at 5p.
Next six months of sales are probably critical for the share price.

Alex Rackwitz

some marketing is for growth. If revenue growth were 0%, what would marketing be to sustain revenue base? That would give you a better idea of gross margin. Probably higher than single digits.

Hi David,

What do you think the market is missing?

Publicly available broker reports show the exponential growth rate and with £80m in revenues in FY2020, there's no reason this would not be a £1bn company at those growth rates. And its in a hot sector. Why is this not a bubble stock? Is there a bear case?

Thanks

Alex

Agreed - and funnily enough £1bn is 42* this years projected sales = the value attributed to the Mobileye acquisition....hmm.

It strikes me that there are several reasons for the current valuation.

1) the company has been listed a while, has had a couple of false starts and consequently there is some investor weariness. Its technology was a jam tomorrow story for years, got picked up by Caterpillar for Mining vehicles just as the commodity downturn really hit and took a long time to get any real traction.
2) It has been stuck in this financing loop - no-one really wanting to bid it up too much as everyone knew it would need more funds. Finally as it got traction towards 7p and seemed set to become a hot story the financing round was duly delivered at 5p. Now there is the inevitable indigestion following the issue of a large number of new shares.
3) Sales expectations - I know I am always very wary of exponential projected sales. I suspect the market is also waiting to see it starting to deliver against those projections.
4) Doesn't help losing your CEO though I understand that was nothing to do with the business and the Chairman is at pains to point out that the foundations were in place long before that CEO arrived on the scene.

I have a relatively small long position and I'd really like to buy more (a lot more) but I can't quite bring myself to do it unless/until I see those sales move like the curve suggests. Of course by then it might be too late.

That's my sense of why the stock hasn't attracted bubble status. Feels right but I'd also love to hear from anyone else who has some insight.

GAMBLORIV

I can see why Seeing Machines would be attractive; safety is big money in the automotive industry and preventing drivers following asleep would be a niche gadget. But self driving vehicles are not far off ad they don't fall asleep.

14th Mar '18

Fully self drive as mainstream is a long way off. Takes years to move these cars into mass production. Semi-autonomous will be first step and Seeing Machines (LON:SEE) type technology is even more important for that.
Plus they are moving into locomotive, aviation and dare I say it eventually flying cars.......
Continuous innovation will be important but what I like is that there is no massive “capitalised” number sitting on the b/s contributing to large depreciation numbers

Small Cap Value Report (Mon 12 Mar 2018) - ESC, EVE, MGP, SEE

Escape Hunt (LON:ESC)

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Graham Neary

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