Small Cap Value Report (Mon 29 Apr 2019) - UPGS, MIND, MRL, LGRS, TRAK, PHD

29th Apr '19 by Paul Scott

47 comments 10335 reads

Good morning, it's Paul here!

I'll be running through the 7am announcements with brief comments below, before 8am, in case there's anything time-sensitive. Your comments are also welcome, of course.

UP Global Sourcing Holdings (LON:UPGS)

Interim results - looks like a good recovery is taking place here. Although that's already been reflected in a share price that has more than doubled in the last 6 months.

I'll take a closer look later today, but only because there's not really much else to review today.

Mind Gym (LON:MIND)

Trading update - in line with expectations.

We've not looked at this company before, so I'll have a look at it later, to get something into the archive for future reference.

Marlowe (LON:MRL)

The Board expects Adjusted EBITDA for the year ended 31 March 2019 to be slightly ahead of current market expectations.

It's done eight acquisitions in the year to 31 Mar 2019.

This is a buy & build group, in building services (safety & regulatory compliance).

This sector doesn't interest me at all, so I won't be doing any more work on this one.

£LGRS

Company name is: Loungers (in case the new ticker isn't working yet)

Here's something that does interest me! I did some work on this a week or so ago. It's a roll-out of all-day bar/bistro venues. The valuation should make a fascinating comparison with Revolution Bars (LON:RBG) (in which I hold a long position) so that is my main interest here. They're different formats, but the economics are similar.

I'll do some more work here on this later today.

Trakm8 Holdings (LON:TRAK)

Poor performance, falling revenues, too much debt. This looks a busted flush to me, so I'm not interested in looking any closer.

Proactis Holdings (LON:PHD)

Similar sort of thing here. It expanded too fast, and took on far too much debt.

Looks a mess to me, so I wouldn't be interested in delving any deeper.

If you look at the cashflow statement, the heavy development spend means that there isn't really much in the way of genuine cashflow.…

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Jonathan C

29th Apr '19

Thank you for your warning to be careful. I do see from Stockopedia that fixed assets increased sharply from 2017 to 2018. Of course, somewhere in Beximco's assets is their 85.22% stake in Nuvista Pharma Limited, acquired in 2018, and I wonder if scepticism over this acquisition could also be a factor in poor performance of the share price.

As regards property, plant and equipment, aside from Nuvista, the only significant additions that I can find in the 2018 accounts are "plant, machinery and equipment" amounting to BDT155,457,707 (ca. GBP£1.5million) and "transport and vehicle" amounting to a similar total, against a profit after tax of BDT2,532,654,301 (ca £25million).

STOKIE

I remember Beximco was one of Evils(Simon Cawkwells) shares He thought had been undervalued

fwyburd

What are we all missing then?

A four bagger in three years on my first investment and a three bagger in 2.5 years on my second.

And why the 'we'? Surely you mean "I" or are you trying to imply you represent other readers and therefore have some sort of numerical superiority in support of your opinions?

And then as Paul has pointed out, the sector they operate in is of very little interest to investors looking to invest in quality businesses.

Ah, yes, so now you hide behind Paul and then put words in his mouth. He doesn't say this isn't a quality business, he says its a business he's not interested in. It's you not him who wish to disagree with my assertion that it's a quality business which is fine but why do you need to hide?

Now you have access to the full SR you can see that ROCE and operating margins are awful - not what I'd call a quality business, in fact, the very opposite.

You make an assumption here that I haven't had access to SR reports before. You know what they say about assumptions...

But seriously, if you reply solely on SR reports you'd be mad. I've had up-to-date broker reports for the last three years from Marlowe (LON:MRL) which provide most of the quant data I like. And I meet with management every six months or so to get the qual.

I think it's actually surprisingly rare that the market makes this kind of valuation mistake. Given the sector it operates in and the poor quality metrics discussed above, I'd say the market is being very kind in attributing such a high PER to the company. It seems pretty rich to me.

I'll leave you to work out how your first sentence and last sentence contradict each other.

Honestly, I'm fine with disagreements but why would you want to shore-up your opinion by pretending you speak for Paul and other readers?

Cheers

Francis

SundayTrader

Call me naive, but this seems a little harsh on Marlowe (LON:MRL). ROCE should look a lot better once the figures in the TU work through. It looks as if this company re-invented itself three years back, so it makes reasonable sense that it is starting to reap the benefit now. The OM is low, but then this seems to be a business consisting of a lot of people doing inspections of boilers, fire alarms, etc, so OM is never going to be high. "Moat" is the key point I would have thought -- why would their customers be hiring them, with their overheads, when they can get a qualified engineer from down the road to do a better job cheaper? The argument seems to be that the burden of just demonstrating that you have ticked all the boxes is worth the extra cost. If true, there may be something to go for here.

Obviously, I don't hold.

simoan

Tbh, the past is irrelevant to those who are non-holders but I'm glad to hear it has been a good investment for you thus far. All non-holders need to know is why it's such a good investment going forwards, which was the reason for my question. Tbh I thought your post came across as a tiny bit promotional so I think it's only right that those of us who at first glance of the fundamentals don't necessarily share your enthusiasm are allowed to kick some tyres.

Crikey, Francis. You've really got the hump with me, for some unknown reason. You said the market was missing the obvious value in the company, so as a market participant myself I used the word "we" to indicate the market in general. I certainly don't speak for anyone else here, they can make their own mind up.

Anyway, don't worry I won't bother replying to your posts in future. It's probably best I just ignore them given your aggressively negative attitude towards a few simple questions.

All the best, Si

Firtashia

If considering buying stock in "shell" companies such as Marlowe (LON:MRL), Jim Slater, in his book "The Zulu Principle", recommended 4 very simple criteria. 1) Ignore the valuation, once people start to value it as per a traditional stock then sell 2) invest only in such companies whose management are adept at buy and build 3) sell if the company starts to diworsify into different areas and 4) sell if any of the management sell their stock. Slater was always very complimentary towards the management team of Charles Skinner, Alex Dacre and Lord Ashcroft at Restore (LON:RST), all of whom then went on to form Marlowe (LON:MRL). I sold out of Marlowe (LON:MRL) late last year as I needed to raise cash so have taken one eye off the company but to my knowledge all these criteria are still valid.

I think you've nailed the key points Sunday Trader.

Marlowe (LON:MRL) has only been trading for 3 years in its new guise. It's a buy and build strategy which seeks to create the efficiencies that smaller local firms don't have by virtue of their size. In addition, regulations are tightening so a larger firm can better stay on top of training and development needs of their staff than smaller ones. And by offering a range of inspection and consulting services around fire, water and air safety, the customer can now buy from one firm all the services they need which reduces procurement complexity. In addition, as compliance is increasingly important, having a PLC supplier, rather than a small local firm, brings additional peace of mind (the "you never get fired for hiring IBM" idea).

Yes, operating margins are low but customer acquisition costs are lower as the cross-selling opportunities are so good (it's the same person buying for each of the services). That being said William Martin, the consulting business they just bought enjoys 31% EBITDA margins, is capital light so makes high returns on capital and has 90%+ recurring revenues.

The CEO put in his own money at the first placing, recently bought more and owns nearly 10%; Lord Ashcroft owns circa 30%.

cheers
Francis

Edward John Canham

Can the powers that be tell me why Si's posts are "under review" ? He disagrees with another poster and is giving an alternate view. What's wrong with that ?

Edit: It's what I come here for !

john652

Hi mojo, Thanks for your comments/answer on UP Global Sourcing Holdings (LON:UPGS)

Hi EJC, I agree, under review is a bit nanny state.

Steves cups

Jonathan
Re Beximco Pharmaceuticals (LON:BXP) you note that debt has risen. I think you will find you have ignored the reduction of 1.4m in non current liabilities. In fact the gearing has reduced from 28.3% to 26.8% (my calc is net debt as a percentage of equity+netdebt)

Hope this goes some way to increasing your enthusiasm

Steve

tightfist

Hmmm... I think it's a bit quick to dismiss Optibiotix in thirteen words. Yes, on a historic purely sales/price ratio it looks ridiculous but in my view it warrants a bit more looking under the bonnet. The ownership of substantial and society-relevant health IP and the intent to split the business by IPO into four parts is significant, as is the relatively low and fixed HQ costs whereby increasing very high margin licence sales/profits potentially fall to the bottom line.

It looks expensive right now but 12 months down the road?

Hi Steve,

That does increase my enthusiasm. I greatly appreciate your input.

Jonathan

Gromley

And there was me get concerned that we become much too consensual and uniform once all* the unbelievers were driven out (*apart from me - I believe absolutely nothing).

To be fair, Simoan did tell me I was wrong!

Personally, whilst the exchange of views have maybe been a bit 'spiky', I think it's all very healthy. So long as good posters don't actually start ignoring each other. Personally I am always happy to have my views questioned and challenged and accept that some will do that in a relatively 'passive' voice and others in a more challenging manner. It's all good!

Denisc

Is anyone encountering slow connections on the Stockopedia login ?

Armorduck

I had a look under the bonnet since I know a little of biology, microbiomes etc. The publications (posters) on the company's website do not instil me with confidence that any IP they may have is of much value. My guess is that Paul's 12/13 words that assess the company from a financial perspective summarise its prospects very well.

30th Apr '19

Phil,

I didn't see that to be honest. Clearly some people don't like being questioned. I tried my best to be diplomatic and carefully word my initial reply to Francis so as not to cause offence and all I got were my words thrown back at me in a personal attack. If any post should be reported it was that one, but I've got better things to do and so have the hard-working peeps at Stockopedia. I guess trying to censure someone by reporting their posts is the next obvious step.

To be honest, I'm getting fed up with this. There's another poster who would have everyone believe I'm some kind of rabid remainer when the fact is I am not the least bit interested in Brexit other than the effect it may have on my portfolio. I suspect very few people would financially benefit as greatly as me from a Hard Brexit, for instance. So why should I care? I'm financially independent, healthy and still a long way from my 60th birthday.

Anyway, I only come here to discuss companies, so apologies for this post, but thanks for your concern.

Call me naive, but this seems a little harsh on Marlowe (LON:MRL). ROCE should look a lot better once the figures in the TU work through.

Hi Sunday Trader,

How do you work out that ROCE will be higher? Not that it could be much lower as of the last interims :-). And the margins are really terrible - only £600k profit after tax on £56m in revenue at the last HY. I don't like investing in "busy fools" but maybe that's just me. I also see the same management team were involved in Restore and Impellam - neither what you'd really call quality long term investments. Again, that is just my opinion.

I'm not ageist, honestly, if you're good enough you're old enough in my book, but I'd have to think more than once about investing in such an acquisitive company with poor financial metrics whose CEO had just finished his GCSE's the last time we had a recession... How do others feel about this?

I thought that SP's ROCE calculation was based on TTM figures. Currently the Stockreport is showing a loss TTM, but a healthy looking estimated profit for 2019. Given that the company has said that profit expectations will be met, returns must be improved this year, on whatever the enlarged capital base comes to.

My interest was piqued just trying to figure out whether there actually is a sensible business model for this company as a quoted investment - arguably it is not worth trying.

Hi armorduck,

Yes, PS's is probably a purely financial view and, if so, it's a fair assessment. I think he said a while ago he briefly tried the product and quit. I tried the product (SlimBiome) and lost a lot of weight and it has reduced my sweet cravings. Now they have moved into Cholestrol and BP reduction as well as working on Medical products (first launched yesterday), sugar substitutes and skin treatments.

I worked for a company with 21 global licences and few need to be successful before you make a lot of very high margin money. The integrity and sustainability of the IP is the key. But none of this is visible in the figures - yet!

I thought that SP's ROCE calculation was based on TTM figures.

It depends what number you look at. To be honest the ROCE has never been anything to write home about, has it? As for the TTM number, as I said, the only way is up!

My interest was piqued just trying to figure out whether there actually is a sensible business model for this company as a quoted investment - arguably it is not worth trying.

Yes, I pretty much came to the same conclusion. One of my own lowest conviction holdings is Flowtech Fluidpower (LON:FLO) but then it has higher margins and a much lower PE rating. Also experienced management, in particular the presence of Malcolm Diamond as Chairman at least helps me sleep a bit better.

But let's stick to the hype and forget the facts.

Small Cap Value Report (Mon 29 Apr 2019) - UPGS, MIND, MRL, LGRS, TRAK, PHD

UP Global Sourcing Holdings (LON:UPGS)

Mind Gym (LON:MIND)

Marlowe (LON:MRL)

£LGRS

Trakm8 Holdings (LON:TRAK)

Proactis Holdings (LON:PHD)

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Paul Scott

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