Small Cap Value Report (Mon 28 Oct 2019) - SOS, CALL, WATR, CER, PHTM, IKA

27th Oct '19 by Paul Scott

40 comments 8259 reads

Good morning, it's Paul here. I'll be writing all 5 reports this week.

Estimated time of completion - about 1pm.
Update at 12:28 - I'm running a bit late, as I spent so much time on Sosandar this morning. So with my apologies, am extending today's estimated completion time to 3pm.
Update at 14:33 - today's report is now finished.

Please see the header for the updates I've covered today.

Sosandar (LON:SOS)

Share price: 19.5p (up 23% today, at 08:19)
No. shares: 162.9m
Market cap: £31.8m

(at the time of writing, I have a long position in this share)

Half Year Trading Update

Sosandar PLC (AIM: SOS), the online women's fashion brand, is pleased to announce the following trading update covering the six month period ended 30 September 2019.

Today's update reads well, and is better than I expected.

The last update we had from Sosandar was on 23 Sept 2019, which I reported on here. I remember that day well, as I dashed around the London underground, mid-afternoon, trying to spot a Sosandar escalator panel digital advert, to no avail! Turns out that they only appear at peak commuter times. That update indicated that sales growth was strengthening, as promised, with sales in Sept roughly doubling on prior year. As I pointed out at the time, a good initial reaction to the autumn/winter range is usually a good omen for this peak season overall.

Sales growth - the LFL sales growth trend looks very positive;

Q1 (Apr-Jun) +23% - this was a big concern, and the share price sold off heavily when announced (understandably)

Q2 (Jul-Sep) +84% (including +112% for Sep)

H1 total +53% (£2.82m)

Oct >100% growth, over £1m (net of returns) revenues, for the first time.

Clearly we can see a very strong, improving sales trend.

Marketing spend - The strong sales growth trend has been driven by increased marketing spend, which is what the company said it would do, so no surprises there. That's why it raised £7m in a placing at 15p (heavily over-subscribed, which I know is true because my own allocation was scaled back considerably).

TV ads seem to be doing well;

These new marketing initiatives are significantly increasing brand recognition and awareness. September, the first month TV went live, saw a record number of email subscriber sign-ups with a 224%…

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rmillaree

28th Oct '19

Graham Ford

See what you’re saying but other companies’ interims seem not to have this issue (expected revenue rather than actual). Take a look at Boohoo’s interims from September

I guess each company has its own criteria as to how confident they are in stating numbers - so rather than look for companies that don't do what Sosandar do lets look at some other companies that do and hopefully that will confirm the principle that not all companies confirm turnover as being quantified exactly until release of interims or finals. I would expect the smaller the company and/or the more moving parts (eg trading outlets - sub companies) the more likely it is that they will err (rightly) on the side of caution in this regard.

Here are two example which use similar wording to Sosandar - that's two of my current holding so i didn't have to go looking too far to find companies that are similarly circumspect about quoting finalised numbers per the "trading update before any interims or finals"- i haven't ever taken this as suggesting the company has any specific reservations about the numbers.

Norcros (LON:NXR) trading update 17/10/2019

Group revenue for the 27 week first half is expected to be approximately £181.2m (2018: £162.6m),

Portmeirion (LON:PMP) trading update 17/1/2019

Portmeirion Group, the manufacturer and worldwide distributor of high quality homewares under the Portmeirion, Spode, Royal Worcester, Pimpernel and Wax Lyrical brands, is delighted to announce that it expects to report record revenue for the year ended 31 December 2018 of at least £89.2 million.

Note your comments ref Boohoo - you seem to be mixing apples and pears there - Boohoo only quoted the actual numbers when they released the interim accounts - the trading update earlier in the month didn't have any specific turnover numbers that i could see. I would always expect confirmed numbers when we have 3 monthly / 6 monthly or final accounts being presented but NOT when its simply an after period trading update with no accounts. When when sosandar release the interims the figures won't be subject to the same caveat they used per the trading update.

Paul Scott

Hi runthejoules,

I'd also like to hear the possible bear case from readers / Graham!

The bear case on Sosandar is very simple - that the company is only achieving rapid growth by spending a load of money on marketing (which is true). Bears think it could run out of money again before achieving breakeven. And/or that growth might stall.

What the bears don't get, is that marketing spend is actually building a rapidly growing, loyal, repeat customer base. Hence money spent now, has a long-term payback, so it's money well spent.

You can't build a new brand without spending a load of money on marketing. This is why a lot of smaller e-commerce fashion businesses are now biting the dust. They're easy to set up, but very difficult and expensive to achieve scale.

With hindsight, the original Sosandar business plan significantly under-estimated the marketing spend needed. Although practically all small, growth companies that list on AIM, under-estimate the cash burn, and under-raise. I wish brokers/promoters would build in a large contingency reserve into growth companies which float, as this problem happens time & time again. In fairness, part of the problem is that founder management often don't want to be diluted themselves.

However, with the Sosandar coffers freshly refilled, management is really going for it now, which is what most shareholders want. Hence why the placing was so well received. Investors want management to scale up the business fast, not fall into the usual UK trap of doing things by halves, and never quite making it.

Regards, Paul.

Tortoise investor

On Sosandar (LON:SOS) one thing I do is follow how many Instagram followers they have as a proxy for the interest in the brand. In fact you can do this fairly simply with any retail brand really (depending on demographic for products). It can allow you to get ahead of news in a trading update by seeing the trend before it comes through in sales.

Ideally I need to be looking at the same periods of time to factor in any seasonal variations, but I at least calculated how many followers gained per day since the last update which is still useful.

19-10-19	34.9k (92 new followers a day)
6-10-19	33.7k (60 new followers a day)
6-7-19	28.2k (32 new followers a day)
28-12-18	22.1k (42 new followers a day)
31-12-17	6,560

I'd been seeing that followers had increased quite a lot recently so was hoping to buy this morning for the first time at 16p but typically there was then the trading update which confirmed that things seem to be going well at the moment. I still got in at 17.2p though so can't complain too much!

In terms of fundamentals, at 3x expected sales it's priced similarly to Boohoo (LON:BOO) so I don't see this as particularly expensive for a fast growing stock providing they can continue to execute well.

I'm curious about the relationship between Instagram followers, and sales. I'm a bit sceptical about it. A private eCommerce business which I seed-funded, has got more Instagram followers than Sosandar, but it literally hardly sells anything.

I can't remember specifically what Sosandar management said about Instagram followers when previously asked, but am pretty sure they said that it's not a good measure of what people are actually buying.

fwyburd

Very good report today Paul, you sure have put the hours in including your Sosandar (LON:SOS) management call. Personally I think you've gone the extra mile so I have no idea why two muppets would give you down votes as it's absolutely undeserved. All done before 3pm is really impressive too.
cheers
Francis

hayashi22

I would have Instagram users represented a younger cohort than the average SOS buyer. Happy to be proved wrong.
Must say their models are rather attractive..or are you no longer allowed to say such things?
Why don't they send some stuff in the post to Diane Abbott?

Zipmanpeter

Ezlifeme - I'd be very surprised if peak time digital tube ads were not priced differently (ie higher) than off-peak times. So unless we know what they paid and how many orders it generated we don't know if they are savvy to do so or not! P&G used to buy bucket loads of off peak TV ads for proverbial buttons (as well as expensive prime time ads) as they found it cost effective and reached a different audience.

Whilst I don't know if they will keep with tube ads, the very fact that they are testing before going big and exploring alternative options with costs related to orders ie revenue, gives me confidence they will ultimately their money spend well. I hope so as I hold.

Thanks Francis, much appreciated. I am trying to improve the quality, timeliness, and depth of these reports, so it's good to hear you noticed!

I switched to the new site today. One of its advantages is that I don't see the thumbs downs at all now - just the net total, so am delighted with that change. Our 2 resident thumbs-downers are now completely invisible!, which means they can no longer demotivate the writers here.

Haha, that reminds me that one of my suggestions to Sosandar (LON:SOS) management was that they try to get Angela Merkel to wear one of their frocks. I didn't get a reply.

Phil Mc

Paul, thankyou for your excellent coverage of SOS today and also for your coverage generally. Both your and Graham's analysis have really improved my understanding generally. I'm still relatively new to stocko but have decided to subscribe for a second year thanks in part to the work you two are doing.

stuartb58

Photo-me International (LON:PHTM) I have been a holder for some years and recently attended the AGM to try to get a better understanding. It does seem a play on whether global acceptance of smartphones for official ID purposes will ruin them before laundry/fruit juice become big enough to more than compensate for ID decline. Think CEO (and 20% + shareholder)Serge Crasnianski said decline in UK ID revenues was about 23% on last year, so other geographies are holding up well and weak sterling will help. What was clear is that laundry is growing as planned and Sempa (fruit juice) is trading very well, with payback now looking likely to be no more than 3 years. Cash implications will become clearer when half year results come out 10th December, but the business still looks to be throwing off lots of cash at the operational level. I suspect that if dividend is cut at all, it will be for good reason i.e to invest more in the growth areas. One likely bonus this year comes in the form of an investment property they hold (factory in Grenoble let at just over £1M p.a to decent covenant and being put on the market for sale). Rents on this were forward sold in 2011 until April 2019, but now revert back to PHTM. Valuation was reduced when the rental deal was agreed and it is in the books at just £648K. Looking through my rather rose tinted spectacles, I added a few more to my fairly modest holding after the AGM, so disappointed with the reaction today.

Chriskay

I am new to stock trading and find Stocko a fantastic education tool. I also really value the daily reports Paul. However, I am somewhat surprised at the positives for Sosander. I appreciate they are trying to market their way into profit using investor’s cash and also that high returns are a feature of an online clothing business but half the purchases returning? That seems incredibly high for a very small new brand with a good demographic customer match and great ads which promise so much, or am I just a grumpy old bear today?

Thornabian

Boohoo will also likely have end-to-end automated returns which also update their ledger. This might not be the case for Sosandar.

mojomogoz

Just looked at Cerillion (LON:CER) and I reckon there's a short hypothesis for the company...being a bit contrary but started looking with interest and then felt that it might not all hang together well. View welcome...put me right...here's my quick notes from looking for anyone interested or who likes the stock to counter me...

1) High customer concentration

2) Recurring revenue only c.33% of total and think the valuation implies its more as a slow down in customer acquisition could have drastic impact,

3) £1m pa director remuneration on £17m revenue, Workforce of other 185 get £8,5 (mainly support staff software engineers in that number -> £46k total remuneration average -> suggests that the development work is pretty low value).

4) gross margin of c.72% based on accounts likely overstated as 70% of revenue comes from 'ad hoc' services supplied rather than recurring software based stuff. Only c.30% from recurring (ie more rev requires more elbows to the wheel and for like for like with 'industrial' company means cost of sales should be higher. In addition near 10% of annual wage cost is capitalised

5) Doesn't make sense not paid down debt quicker

6) Very low expensing of R&D which hints that the development being capitalised is all standard customer work rather than anything fancy and new. This work should be expensed knocking £800k off of profit. Its an old business and so this is just accounting manipulation to overstate profit,

7) relatively high bad debts in trade receivables suggests that they have payment vulnerability in industry chain

I think that Cerillion looks quite vulnerable to any setback in customer wins or big customers and like they provide a product that may be vulnerable to capital cycle events in end client (telecos mainly)

Sosandar (LON:SOS)
I appreciate they are trying to market their way into profit using investor’s cash and also that high returns are a feature of an online clothing business but half the purchases returning?

Hello Chriskay

I think if you look back at the previous discussions on Sosandar (you can search for previous days where the stock has been commented on and go to discussions) you will find there has been pretty thorough discussions about the returns % - as long as the gross margin is reasonable enough the % of customer returns is completely meaningless. looking at boohoo gross margin is 54% and Sosandar manages 55% - don't know if this is a fair lfl comparison but as long as the margin is decent enough the level of actual returns isn't too important. The high returns rate is just a symptom of the fussiness and of the customers in the market sector they work in :). I think is par for the course this sector type will have to try and 3 to find one they want to buy - if their customers are keeping 1 out of 2 thats probably pretty good going :)

Hi Phil,

I'm still relatively new to stocko but have decided to subscribe for a second year thanks in part to the work you two are doing.

Excellent news, thanks for your kind message of support!

Why do so many folks get hung up on returns? Have you seen the number of garments women in particular try on in a store before they buy? They hand back a lot more than 50% there. Dealing with returns is an unavoidable cost of not having to pay for shops and changing rooms. So long as SOS isn’t out of kilter with other online female brands - and it isn’t - it’s not worth worrying about.

29th Oct '19

Hi Chriskay,

The returns rate for online womenswear is typically 40-50%, that's the industry norm. It makes sense if you think it through. When trying on clothes in a physical shop, it's normal for people to buy about half the items they choose, and put half back. So it's the same online, where the customer's own home is the fitting room.

A lot of women tend to order 2 sizes of the same style, keep the one that fits best, and return the other. Shopping habits have also changed in recent years, such that women often deliberately over-order, then keep the items they like best, fully intending to return quite a lot of the things they order.

If you talk to Sosandar (LON:SOS) management about this, they regard it as "a cost of doing business", and try to manage it down, but it's not something that concerns them. The CFO referred to it as being "some additional administrative costs", but he's not worried about it in any way. So neither should investors be worried.

SOS has a big advantage, in that its average order value is about £100. Therefore, paying (guessing here) maybe £5 in additional costs for postage & the outsourced warehouse to handle returns, is not a problem. Returned stock "goes straight back out again" to a new customer. SOS management has told us before that they don't have a problem with customers abusing the returns policy. That might possibly be because they serve a more mature, affluent customer, possibly?

Overall then, returns is not an issue that investors should worry about.

swanvesta

Some interesting bear points which (as an investor) I felt worth pursuing. Here's my response to some of them:

to me Repeat Order levels of 1.66 might imply that if a customer orders
once then in the next period they order 1.66 times. Thus sales should be
rising by 66% without any marketing spend. I know this is simplistic
etc..

No, I think the repeat order level is simply an indicator of the value of the customer. If it stayed unchanged between periods and the number of customers stayed unchanged then the number of orders would too. An increase in sales would then be due to an increase in customers.

I am also confused how the metric has risen year on year. It is calculated as total orders up 47% year on year,
divided by the active customer base up 70% year on year
I don't understand how if the bottom part of the equation has increased more that the ratio has risen.

I think it might be worth bearing in mind that 'active customer base' will be reported at the end of the period. It won't be that high throughout the period, especially when the big marketing push is at the end.

the customers are described as 'sticky' yet the active customer base has
declined from 84,500 total customers a year ago to the current active
customers 75,056. So despite 12 months to recruit more active customers
(with a very large marketing budget!) the number of active has reduced.

I think perhaps you are comparing apples and oranges. The 84,500 figure was the size of the customer database (i.e. the size of the mailing list) last period, compared with 44,096 active customers. The figures for the latest period are 148,884 and 75,056. Both measures have clearly increased rather than declined.

abtan

30th Oct '19

Hi Paul, or anyone else who can help,

A quick thought on Sosandar (LON:SOS) margins.

If:

AOV = £100
Returns are c 50%
VAT is 20%
Gross Margins are c 50%

then does this mean the "adjusted" Gross Profit per order = £21 or 21%?

And presumably one would need to take away postage/warehousing costs from this, though I'm not sure where postage costs sit in the P&L.

I have no idea if this is a positive/negative adjusted figure for an online fashion business, just trying to get my head around the figures.

Cheers

Small Cap Value Report (Mon 28 Oct 2019) - SOS, CALL, WATR, CER, PHTM, IKA

Sosandar (LON:SOS)

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Paul Scott

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