Small Cap Value Report (Mon 25 Jan 2021) - BOO, TET, SPE, ASC, HAT, YCA

25th Jan '21 by Paul Scott

126 comments 16883 reads

Good morning! It's Paul & Jack here with the SCVR for Monday. Many thanks to Jack for doing the heavy lifting on small caps today, freeing me up to write/think about fashion eCommerce! Much appreciated.

Timing - today's report is now finished.

Agenda - starting with big news on the rapid move of fashion brands online.

Paul:

Boohoo (LON:BOO) - acquiring intellectual property (only, not shops) from Debenhams administrator

Treatt (LON:TET) - upside case, after chat with Lord Lee

Asos (LON:ASC) - in discussions to buy some Arcadia brands

Jack:

Sopheon (LON:SPE)

H & T (LON:HAT)

Mello Monday - tonight from 6pm

A quick reminder that this popular, fortnightly, online investor event is coming up later today, from 6pm. More details here - as usual, a very good line-up, including our own Jack, who’s back by popular demand!

Lord Lee is doing a talk about how the current rules on takeovers need urgent reform. I totally agree with him, and think we should all get behind this ShareSoc campaign to push for more transparency. In particular;

Joint Press Release from ShareSoc & UKSA on behalf of individual investors

ShareSoc and UKSA recommend The Takeover Panel:

Review their current rules, which disadvantage individual shareholders and all those who are not privy to a potential bid.
Sets out a clear and orderly framework for takeovers, including measures to ensure fairness to shareholders and other stakeholders.
Consider issuing Panel guidance for assessing when talks are serious, so that announcements can be made with the usual caveats – “talks are that an early stage”, “no certainty that a bid will be made”, et cetera.
Tighten the interpretation of what behaviour is acceptable – and, in particular, review the case of Signature Aviation and Blackstone.

Boohoo (LON:BOO)

(I hold)

Exciting news late last night, as the FT reported that Boohoo (LON:BOO) (I hold, as do many Stockopedia subscribers) is apparently buying the Dedenhams brand & online presence, for £55m. NB it is not buying the shops. This is potentially interesting on a number of levels. Firstly, it means the BOO group (already 9 brands) is spreading its wings into a much broader demographic, not just fast fashion for young (mainly female) customers. Secondly, I seem to…

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mojomogoz

25th Jan '21

Good evening stock pickers. I don’t see why this lateral move for Debenhams brand/platform is good news for Boohoo (LON:BOO) shareholders. I think it throws shade on the strategic focus, management and corporate motivation of boo. Apologies if I’m repeating material from above but I’ve only skimmed SCVR today.

Here goes some quick points. I do not claim I have particularly good insights here and I also acknowledge that boo has had an impressive trajectory to this point:

Why pick a fight with lots of other retailers on new ground when you were blitzing them on your chosen battleground with your well drilled forces? With the kicker of a long international growth runway ahead of you? Better to press down on that peddle straight ahead than distract your capital and resources with tangents.
£55m for a defunct brand, website and its customer database that’s not aligned very well to your core franchise and its vibe seems quite expensive. At best its strategic diversification and at worse it's the dreaded diworsification that befits old conglomerate-empire mindset…
..Ashley at Sports Direct/Frasers is perhaps a similar comparison. He’s moved beyond his core in broad waterfront (inc Sofas, VR gaming, etc). He’s kind of saying he’s a better retailer than others and he’s got more balance sheet and time frame to sit out the interim tougher periods. I think there’s a decent chance Mike’s on to a winner...but its a tough ride and not one that is rewarded by the market in the short run.
Clearly there’s name recognition and some element of implicit trust in the Debenhams label...but boo has got to make all the broad product sourcing and supply chain stuff work now as well as remarket the Debenhams brand. There’s a lot to do. Its more ground zero than plug and play.
There’s an oddness in signalling around their core activities too. If the boo approach is so scalable and special then what’s going on with boohooman? Boo can double their target market given interest by youngmen in clothes that isn’t very distant from young women (and probably got a lot less returns). Why isn’t this the area of acceleration through excess capital. This is a bit of a non sequitur IMO for some years now. They should be making this avenue work more and its puzzling why they haven’t. I wonder if it hints that there’s a large element of luck with timing and brand in the (very) young female cheap-ish fast fashion market and that they can’t recreate that ‘luck’ elsewhere (there’s lot of work and good judgement that goes into that ‘luck’ so I’m not denigrating...just thinking out loud)…so...
…(I’m out of my depth on this comment for sure…) does it hint that boo is really teen girl fashion and struggling to move beyond that? I know from family and friends that mums buying for daughters has been hot for boo. Teen boys is less of the same involved bonding thing for clothes. Anyway, a bit of a ropey comparison…
...but it brings me back to why would you want fuddyduddy Debs website. Is it as your current platform is actually quite limited in its reach and that they see the end in sight for it and need to find new avenue and product lines to expand…
...I’ve long been sceptical of how globally scalable something like boo can be without significant capital (people, knowhow, marketing, etc) in local markets. The vibe in Italy is different from Japan which is different from Japan. Global high cache brands can cross but boo is something different. Its local lifestyle and vibe. Its your street corner more than London West End (which is of course the world at high end perspective...I worked in Mayfair for years...tedious place!...I much prefer street corners being a street corner boy back in the day)
I assume that the supply chain will need a lot of overhaul partly from decayed old relations and objects and partly as boo will want to make its own vibes. If they are going to do this with quality then this is a much bigger job than shifting clothing style
£55m for a branded website! As I’ve said this makes me wonder whether it flags some strategic issues with their current digital profile and routes to market and that to continue their UK penetration they need to create a non overtly boo channel? This could talk to issues with the likes of Next (clearly Next should probably be their most desired destination), Asos or others in variety of ways.
I can see that beauty is a nice fit. I’m far from an expert in the area but I’d guess that Debenhams are not renowned brand in themselves in beauty and like others they are a venue for lots of brands/concessions. Why pay £55m for a channel to sell beauty products. If it had difference making potential for boo they could load it down their current digital channels without paying a £55m entry price. Market heavy, fit to customer and surely the ROCE coin and growth trajectory is much superior? Or do they want to sell to grandma too?
I’m a corporate governance and management sceptic on boo (this predates the recent ESG furore and I’m not referring to that circus, in which boo along with media, govt, etc are one of the competing clown acts IMO). The Debs buy feels a little bit as a sort of ‘just as we can’ purchase and empire building. Its not obvious that its shareholder value maximising...there’s a lot to prove on that. It feel perhaps ego puffing. Or about dominating territory in the retail turf war. Not the return optimising strategy that goes with high multiple.
Doing something that scales quickly with Debenhams is going to eat some margin. Are shareholders happy with that? Shifting boo’s jam tomorrow promise to jam next week and a bit more abstinence today.

(Apologies that there's a bit of repetition above and could do with editing...time)

I’m not saying that boohoo is about to keel over. They are clearly successful in their current niche. I believe that this acquisition is probably quite portentous in terms of signalling. Not necessarily ominous but from a fundamental perspective it requires careful assessment. Boo have excess cash to acquire but neither is £55m nothing and probably requires significantly more capital to turn it into more. How likely is it that boo can replicate its capital recycling into high ROCE growth with a mainstream shopping brand. Isn’t this going to be a less fruitful use of capital?

I find the ‘like Amazon’ comparisons regularly made by investors to be lazy. Amazon is an exception rather than a comparison for anyone. If the analogy applies to boo then its when it sticks to online fashion retail...not some UK Amazon-lite built from boob tubes rather than books.

Current market conditions show that with revenue growth (cash flow more optional but boo does have it so real positive for them), ‘platform’, high multiple and investor belief/enthusiasm then ostentatious goals are achievable. Enough belief in the personalities selling the dream and changes in direction and strategy are tolerated, even cheered. Up to you decide whether the boo management attain this exalted status... I believe they have still to prove they have arrived there so I don’t think they have a long hang rope if they misstep in a new area...that could get troubling for valuation and margins.

DYOR. I know many of you guys love Boohoo (LON:BOO) ...so my scepticism may not be welcome. Some of you couldn’t care about the above issues as you’re in it for the price ride and out if it corrects x% from here. But some of you are true believers...Kamanites...you guys can put me right ;)

Your mojo out

PS very long...so I've put up as standalone post here https://www.stockopedia.com/co... . That means its also easier to find in future and discuss (I'm probably way off beam!)

Ken Peare

I think the Boo acquisition looks really interesting - bought 300m visits for 55m ie 18.3p per visit - that looks to be very good value.

Zipmanpeter

Thanks Silver Moon - missed the g in the company short code (AMO vs AMGO). I did indeed mean Amigo.

SundayTrader

I take it you mean Amigo Holdings (LON:AMGO), not Amino Technologies (LON:AMO).

sharw

Copy and paste:

Jack I first bought Sopheon (LON:SPE) in Feb 2019 at 1140p. It was

I'm on the website on a laptop. I have a feeling it is the app on a mobile that causes problems.

abtan

Hi TStubbs

It's a good point you make, and a valid one.

I guess the issue is that I can't think of many international players who don't already have a logistical presence in both geographies and so won't be impacted by the recent changes; Asos (LON:ASC) , Inditex and H&M spring to mind.

I'm not sure what portion of UK sales Zalando has, but I imagine a much larger portion of their sales is to European countries. In any case they seem to operate in a slightly different niche to Boohoo (LON:BOO) .

Also note on the zalando.co.uk website it states that "There will be no additional VAT or duty charges requested on delivery by our carriers." I'm not sure how they are able to do this as I don't believe they have a UK distribution centre.

Are there any others who operate in the fast fashion niche who might benefit from reduced Boohoo sales in Europe?

It will be interesting to hear how things are going when Boohoo (LON:BOO) next updates the market.

Cheers

timarr

it goes both ways UK customers who purchased clothes from European sellers prior to brexit will start buying from UK to avoid the import taxes and handling charges.

Boohoo (LON:BOO) will be fine, and will pick up some more UK business short term to offset lost EU trade, but ultimately they need to sort their European distribution in order to address the European market which is five times larger than the UK. They also need to address their rules of origin issues where they source clothes or materials from outside the EU - again this also applies to EU companies shipping to the UK but, again, they have a much bigger market to source from.

By and large raising trade barriers favours large companies over small ones so most of the larger quoted companies in either the UK or the EU will be OK and will pick up business at smaller competitors' expense. Smaller companies in both markets will suffer disproportionately but UK ones more than EU ones as the latter have a larger addressable market to pivot to. It'll also favour marketplaces who can aggregate sales and manage duties and taxes on behalf of smaller suppliers.

Broadly, in anything other than the short term, it won't impact larger companies much but it'll hurt smaller ones quite badly.

wildshot

As I understand it IC and FT are part of the same group.

Hi abtan

I believe Zalando have pushed the problem onto suppliers who need to obtain clearance before supplying their European warehouses. How that works I don't know, sounds like a nightmare.

They've also made suppliers handle returns - they have to go directly back to the supplier rather than via Zalando. You'd imagine a lot of smaller suppliers will give up and look elsewhere in Europe.

I don't think any other company is quite like Boohoo (LON:BOO) - which makes the Debenham's acquisition look a bit odd to me (although I get the marketplace angle). But their ultra fast fashion approach is why they're vulnerable to the ESG hawks - it's almost impossible to pivot away from their current model without blunting their edge.

For me the technological edge and amazing targeted marketing make them a hold, but I do question my own ethics in doing so.

Gdawgeedawg

In the H & T (LON:HAT) report they said fx was ahead of expectations, >60% if I remember right of what it was the previous trading period.

The Ox 2906

it feels a bit to me that Boohoo (LON:BOO) might have felt the need to do something but obviously couldn’t compete with the bids for Arcadia etc. Of course maybe they were showing restraint re the latter and that would be commended but to buy DEB feels like a poor second best to me. Seems a shift in logic to flog cropped tops etc successfully to teenagers and then shimmy over to a failed brand for fuddy duddies (no offence to any customers on here). “Marketplace” talk seems like an excuse for becoming a jack of all instead of remaining the master of selling cheap clothes to worldwide teens/20 somethings.

Boon

The FCA investigation will hold back any potential upside in the SP of H & T (LON:HAT) until Q2 it looks like - quite some time away.

Also, if you look at the pledge book, its massively down YoY, due to lower new pawnbroking activity. This is what drives the revenues/profits - if the pledge book is low, the next 6 months of revenues is going to be a struggle, to try to recover to pre-COVID levels.

Plenty of reasons for drop in Saga (LON:SAGA) today:

Fully changeable, probably refundable sales. Not locked in
Government plans for 10 day hotel quarantine. Can't see it not extended to cruise. Otherwise its a massive loophole (jump on a ship in Belgium, France, or Spain and get into the UK without quarantine)
European countries also planning similar quarantine measures. Who wants to go on a cruise to nowhere?
Moderna released statement that their vaccine is not as effective against the South Africa strain, raising fears that multiple vaccinations will be required. Another barrier to cruising.

What makes me bemused is that the share price is mimicking the wider travel sector shares, yet currently makes £0 revenue in travel, and even with the two ships, the majority of revenues will still come from other non-travel divisions!

If you want to see the crazy valuations attached to fashion marketplaces, look at the share price of FarFetch in the US!

ken mitchell

If compulsory hotel quarantines are still in operation when Saga cruises hope to restart then your points are valid. The hope is, if supply shortages don’t become a major issue, that by the time Saga holiday business anddtheir cruises are up and running, hotel quarantines should be over in many Countries desperate to revive their tourist businesses.

Maybe we’ll know better when Saga update tomorrow.

GN100

There's also the LSE for an RNS feed https://www.londonstockexchang.... Set them up as email alerts. I have both Investegate and the LSE (which I initially set up because the Investegate feed suffered from some glitches a while ago). This now seems to have been sorted but I left them both running. I generally find that the LSE feed arrives earlier than the Investegate feed.

MiserableJacktPotato

Whilst I would've liked them to buy some bits of Arcadia, actually that is just more of the same.

This gives them many more opportunities and directions in which to increase the top and bottom line.

They've pretty much nailed the cheap clothes business. Sure they can keep growing and rolling out brands across the world but where's the challenge in that - they've proved they can do it.

Harry Hindsight

Put funds in A J Bell and get their Shares magazine for free (£5 weekly) and is very good for funds stuff and some good tips actually inc the US of A. Have a shares account for a bit of fun (you deserve it as well as your kids) but don't trade too much as a bit costly. IG when get a bit of confidence and then can go spread betting which is the 'roller coaster' of fun.

hagon

26th Jan '21

Thank you so much to everyone who took the time to reply, I really appreciated it. I actually do not want others to do the heavy lifting, but it's for my wife's SIPP, and having already invested most of her SIPP into shares, she wants a bit of diversification!

I will look into both IT's and the portals you mention, thank you all!

UK_Investor_8888

Re £SAGE

"Government plans for 10 day hotel quarantine. Can't see it not extended to cruise. Otherwise its a massive loophole (jump on a ship in Belgium, France, or Spain and get into the UK without quarantine)"

Why doesn't the Government declare sealed cruise ships as hotels?...

Two problems solved in one: The customers get their COVID free holiday, and do so within a large isolated bubble with the sea around the edge.

So long as the ship doesn't dock and no boats come along side (nor helicopters, parachutists, or passing drifters in dinghies), it's probably more bio-secure than a Premier Inn with a fence around it.

Small Cap Value Report (Mon 25 Jan 2021) - BOO, TET, SPE, ASC, HAT, YCA

Mello Monday - tonight from 6pm

Boohoo (LON:BOO)

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Paul Scott

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