Small Cap Value Report (Mon 16 Oct 2017) - Footasylum, SYS1, BVXP, SPSY, RBG

Monday, Oct 16 2017 by

Good morning!

I'm writing from my underground bunker in advance of the post-tropical rain which is about to strike Ireland.

There's an eerie silence outside, unusual cloud formations have appeared, and the animals are acting strangely.

All in all, these are fine conditions in which to write about a few stocks:

Footasylum (LON:FOOT)

Intention to Float on AIM

It's a new fashion retail float, so I'm sure many readers will be looking at it either as a potential purchase or as a comparison with their existing holdings.

The basics:

The Company retails "on-trend" product ranges which are predominantly aimed at 16 to 24 year old fashion-conscious customers and are sourced from an extensive stable of third party and own brands.

Similarity with Boohoo.Com (LON:BOO) in terms of age bracket but with the emphasis on footwear, obviously!

The Company operates a multi-channel model which combines a 60-strong store estate - in a variety of high street, mall and retail park locations in cities and towns throughout Great Britain - with a fast-growing eCommerce platform and a recently launched wholesale arm for distributing its own brand ranges via a network of partners. In FY17, the store estate accounted for 71 per cent. of revenue and eCommerce accounted for 29 per cent.

Next (LON:NXT) (in which I hold a long position) enjoys 47% of branded sales from its online Directory arm, so Footasylum hasn't quite achieved that sort of mix yet. But 29% online is still a significant level to have reached already.

The retail growth plans in a nutshell are to open 8-10 new stores per year, with the potential to get to at least 150 (presumably over the next decade, given that it currently has 60).

Management plans are a bit unusual: the former Chief Executive off JD Sports Fashion (LON:JD.) is scheduled to join Footasylum as Executive Chairman in June 2018. But they already have a CEO, so it looks as if there is going to be some kind of power split between her and the Exec Chair? Clarity would be helpful.

Financial results are presented as follows:


Growth numbers are clearly quite good…

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

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System1 Group PLC, formerly BrainJuicer Group PLC, is a United Kingdom-based company, which is focused on marketing and brand consultancy, with proprietary market research and advertising solutions grounded in the principles of behavioural science. The Company’s services include System1 Agency and System1 Research. System1 Agency is advertising agency, that creates advertising proven to translate emotion into profitable brand growth. System1 Research produces the FeelMore50, an annual ranking of the world’s 50 TV and digital ads. The Company offers its client create 5-Star, fame-building communications. The Company operates in the United Kingdom, the United States, Continental Europe, Brazil, China and Singapore. more »

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Bioventix PLC is a United Kingdom-based biotechnology company. The principal activity of the Company is the development and supply of antibodies. The Company specializes in the development of sheep monoclonal antibodies (SMAs) for use in immunodiagnostics focusing on the areas of clinical diagnostics and drugs of abuse testing. The Company's non-vitamin D business consists of antibodies, NT proBNP (heart failure), testosterone, Free Triiodothyronine (FT3) (thyroid hormone), estradiol, and various drugs, such as tetrahydrocannabinol (THC)/cannabis, and progesterone. The Company offers products for indications, such as thyroid, fertility, oncology, cardiac, vitamin D, drug of abuse, infectious disease and miscellaneous. Its sheep hybridoma technology produces cell lines that secrete SMAs. The Company offers a panel of SMAs to 25-OH D and has various 25-OH D2 and 25-OH D3 specific antibodies. It sells its products through direct sales and through distributors. more »

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Spectra Systems Corporation provides technology-based security solutions. The Company operates in three segments: Authentication Systems Group, which captures the hardware, software and materials related to banknote, tax stamp and other high value goods; Secure Software Transactions Group, which provides an internal control system (ICS) software offering to the lottery and gaming industries, and Banknote Cleaning Group, which captures the technology related to cleaning soiled banknotes. ICS provides tools for fraud detection, money laundering, match fixing and statistical analysis. The Company develops and sells integrated optical systems across a spectrum of markets, including currency manufacturing and cleaning, branded products, industrial logistics and other highly sensitive documents. The Company's solutions include engineered materials, sensors and quality control equipment. The Company's materials are available in several forms, including particles, threads, inks and coatings. more »

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  Is LON:SYS1 fundamentally strong or weak? Find out More »

36 Comments on this Article show/hide all

Laughton 16th Oct '17 17 of 36

Re Revolution Bars (LON:RBG) - share dropping. From RNS re proxy votes it looks as though Stonegate deal could well be voted down.

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sharw 16th Oct '17 18 of 36

In reply to post #229143

Yes - you are missing the fact that the Court meeting needs 75%

The proxy deadline has passed so somebody would have to physically turn up at 10 a.m. tomorrow at the meeting with authority to exercise the vote for 20,920,080 shares to get to 75%.

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kbkb 16th Oct '17 19 of 36

In reply to post #229203

Laughton...thanks for that,

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FREng 16th Oct '17 20 of 36

In reply to post #229203

So more than 75% of shareholders think Revolution Bars (LON:RBG) is worth more than £2.03. That should create a share underhang!

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LongbeardRanger 16th Oct '17 21 of 36


Re System1 - you comment:

It's a huge reduction in PBT despite a relatively modest reduction in gross profit, which I believe is attributable to much higher staff costs after some new hires were needed to bolster the offering.

It's the old problem with investing in consultancies - the revenue split between staff and shareholders can end up primarily favouring the latter

I can understand this comment but actually I think consultancies can be good long term bets. I hold Omnicom shares, and would consider holding shares of other ad agencies such as WPP (LON:WPP) and M&C Saatchi (LON:SAA). Both WPP and Omnicom are huge multinationals, but M&C Saatchi is quite small and so more comparable to System 1. But all three have delivered good results over time.

Part of the reason for this in my view is that, although advertising as an industry is undoubtedly cyclical, these companies all have very good client retention and a good degree of recurring business as a result. You can see this in Omnicom's financials in that it has very, very consistent operating margins, even in bad years (because it still retains clients and can scale down variable compensation to protect its margin).

So for me, System1 is potentially investible. But the difficulty for me is:

-it seems to have a less stable recurring client base than the ad agencies I mentioned. This seems to be a structural feature of the type of project it works on

-it is suffering increased competition.

So I worry that other agencies will simply copy its offering and it won't be able to retain clients.

Could get interesting if it drops further but at the moment I'd feel safer in M&C Saatchi (LON:SAA).


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Laughton 16th Oct '17 22 of 36

In reply to post #229223

Ah - if only life were so simple.

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gus 1065 16th Oct '17 23 of 36

In reply to post #229163

Hi FREng.

I don't agree. I can think of at least two good reasons for institutions to hold onto their Revolution Bars (LON:RBG) shares.

1. They might agree with the brokers' analysts and many commentators that the Stonegate offer is at an undervalue. Hold onto their shares, vote down the offer, maybe buy some more from the short term speculators who are off loading and hold for the long term.

2. Tactically, demonstrate to the likes of Stonegate and their advisers Barclays, that insti shareholders won't simply roll over at the first sniff of a hardball approach on a takeover. Next time, for this or another bid situation, they might think twice about trying to strong arm the likes of Artemis and may be more willing to negotiate a sensible price. Bidding for a public company is an expensive process, especially when it fails. Lots of unpaid fees and third party costs to be picked up. Also a fair bit of reputational egg on face as well.


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FREng 16th Oct '17 24 of 36

In reply to post #229238

Gus  (re £RBG)

I thought of (1), but wouldn't it make more sense to sell and then buy back when the price was lower? There seems to be plenty of liquidity.

Your (2) seems to be adequately demonstrated by voting the deal down. Whether they then hold is a different decision.

But I'm not an institution, so I don't have a good insight into the considerations that motivate those who deal in such high quantities of shares.

Anyway, the market will do what the market does. The decision I have to make is when to buy some more, since I think the current SP seriously undervalues the business medium term, even though trade seems poor at the moment.

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Graham Ford 16th Oct '17 25 of 36

In reply to post #229228

Hi Phil. Not sure that advertising agencies and market research agencies are really alike enough in their businesses to read across directly like this.

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Graham Neary 16th Oct '17 26 of 36

In reply to post #229278

Yes, there is a lot of low-margin, pass-through revenues with the advertising agencies. Quite different businesses versus market research companies. But I agree with Phil's other ideas.

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Tony John 16th Oct '17 27 of 36

I will wait for more information before investing look's a bit ify to me, would like a few figures from previous years

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gsbmba99 16th Oct '17 28 of 36

Peter Harrison (£bvxp) has sounded a note of caution on Vit D antibody royalties on more than one occasion.
16/17 Interims
"The roll out of our customer’s vitamin D assay products has advanced further towards completion."
15/16 Prelims
"This roll out process has advanced but is not yet quite complete and we remain optimistic that revenues from vitD3.5H10 will continue to grow modestly over the next year."
14/15 Prelims
"This roll-out process has advanced but is not yet quite complete and we remain optimistic that revenues from vitD3.5H10 will continue to grow over the next year or so."
Obviously, this could be the year though it would strike me as a bit unusual for organic growth of 24% to drop to "modest" in a single year. That would be a pretty drastic deceleration.

I was encouraged by the new found disclosure bug that saw them reveal some of the growth rates of the "core" portfolio. Testosterone (market entry 2009) £600k, +12%. Virtually every high throughput diagnostic company uses the BVXP antibody. T3 (market entry 1995) £500k, +33%. Estradiol (market entry 2010) £300k, +30%. Progesterone (market entry 2013) £200k, +51%. (Market entry referenced from the portfolio slide in the VegPatch post Graham linked). Those are very strong growth rates for products that have been in the market for quite a while. Those growth rates may not be all "organic" since they could include new licensees or a full year effect from a prior year licensee.

They have a big hole to fill with the loss of NT pro-BNP (which, incidentally, went from about £300k to £1m in about 4 years). I take at least some comfort that the growth rates for the "core" portfolio are very healthy and that Siemens HS troponin launched in May. Medium-term (2-3 years), they have some interesting things in the pipeline. Androstenedione was last described as already providing "meaningful" revenues. A non-exclusive test for HIV was last reported as in evaluation and four exclusive tests (cancer, viral, vitamin deficiency, thyroid) are also in evaluation. Longer-term (5+ years), secretoneurin (cardiac) and beta amyloid (Alzheimers) could be very interesting and the antibodies developed for these tests were described as "exciting" by a man not prone to hyperbole. I believe both secretoneurin and beta amyloid have diagnostic method patent protection which may mean 2% of a higher than normal test price.

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Graham Neary 16th Oct '17 29 of 36

In reply to post #229118

Hi Chris, thanks for flagging that up for me. I've taken a look at it now, although to be honest I do find it a very difficult one!

Best wishes


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BlueFrew 16th Oct '17 30 of 36

In reply to post #229308

Bioventix (LON:BVXP) - I was at the hospital today with my son (he has Duchenne Muscular Dystrophy) where he once again had a blood test to check his vitamin D levels. This is an important check now which wasn't routinely carried out when he was originally diagnosed. There have been studies showing that low levels of vitamin D can be detrimental in Duchenne (and I believe other neuromuscular conditions). So my son takes a vitamin D supplement and his levels are regularly checked.

This will be where some of the growth in vitamin D testing will be coming from. As the evidence base grows and clinical guidance is updated I think there is still growth left for vitamin D testing.

(long £BVXP)

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timarr 17th Oct '17 31 of 36

I used to hold SYS1 back in the Brainjuicer days. I gave up when it produced two successive trading statements. The first announced outperformance but then noted that most of the benefit of that would go to staff due to the incentivisation scheme. The second was a profit warning a few months later that turned out to have minimal impact because it meant the staff didn't get their bonuses.

At that point I put it in the "too hard" pile, and moved on ...


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Funderstruck 17th Oct '17 32 of 36

Regarding SPSY & their more recent area of application; the coffee machine identifier is I believe for Coffee Capsules, not Cups; No doubt to prevent copycat cheaper capsules muscling in ; as they have done with 'Nespresso' That of course could limit the sales of the coffee making machines if buyers realise they are limited to high cost coffee capsules.

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VegPatch 20th Oct '17 33 of 36

In reply to post #229308

Great detail, many thanks gsbmba99

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riosurfer 27th Oct '17 34 of 36

In reply to post #229198

Athletic shoes sell well on line across the world. Sizes on existing pairs are easy to check, so sizing is less of an issue than normal shoes or even clothes. This space continues to grow as it appeals to Gen Z's preference for easy, practical attire. Look at growth of brands like Netshoes in Latin America, which is Nike's biggest client in the region. The market opportunity seems robust to me. Also, I don't think Nike will want to become too dependent on Amazon. I believe that they will continue to drive "cool" new stock through high quality retail partners like JD.

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tiswas 9th Feb '18 35 of 36

In reply to post #229308


You seem to know the Bioventix (LON:BVXP) story pretty well having just read your post back in October.

The sp seems to have pulled back a fair way, below £20 at one time today from nearly £30 in October, although it had moved up pretty quick at that time.

Do you think the concerns are filling the loss of NT pro-BNP or do you think there is more to it, other than current market shenanigans? The stockrank rating is down to 66 and it has reached key support on the chart but on all other measures it looks like a quality company that I would like to add to my portfolio.

I would be pleased to learn your thoughts or those of other holders.


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deucetoace 9th Feb '18 36 of 36

In reply to post #313278

Methinks price got ahead of earnings in what is a very impressive business

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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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