Small Cap Value Report (Mon 4 Nov 2019) - TM17, AUK, ZAIM, DUKE, KGH, ZOO, LWRF, DFX, MTC

4th Nov '19 by Graham Neary

23 comments 7899 reads

Good morning! It’s Graham here with the placeholder for Monday’s SCVR.

I’m writing this from a gently swaying hammock, pitched in an indoor botanical garden, in the suburban outskirts of Yokohama, Japan. I’m surrounded by some very strange-looking plants and flowers. The great thing about shares analysis & investing, is that all you need is a laptop and wifi, and you can work literally anywhere on earth.

Cheers!

Graham

(Just kidding :) )

There are lots of "bitty" RNS statements today - trading statements and other minor updates. I might deal with a higher number of updates but spending less time on each one. Let's see how it goes.

Provisional list:

Team17 (LON:TM17)
Aukett Swanke (LON:AUK)
ZAIM Credit Systems
Duke Royalty (LON:DUKE)
Knights Group (LON:KGH)
Zoo Digital (LON:ZOO)
Lightwaverf (LON:LWRF)
Defenx (LON:DFX)
Mothercare (LON:MTC)

Timings: finished at 15.50.

Team17 (LON:TM17)

Share price: 307.5p (+3%)
No. of shares: 131 million
Market cap: £404 million

Trading Update

This is a very brief update!

The Company has continued to experience strong customer traction from both new and established games throughout the second half of the year and now expects both adjusted EBITDA and revenue to be ahead of market expectations for the current year.

The performance has been driven by continued sales momentum across the portfolio of titles.

Team17, owner of the Worms franchise and many other titles, has only been listed since last year. So far, the signs are positive.

There's nothing for me to analyse in this update but from a StockRank perspective this is a High Flyer and could be worth its 28x earnings multiple.

The main thing I would be worrying in the video games sector is a company's dependence on a small number of games for financial success.

The most recent annual report stated the following in relation to this:

The Group has historically been reliant on a subset of successful titles to generate a large share of its revenues. Should the Group fail to competently manage the lifecycle of its core games this may adversely affect it financial results.

The Group has expanded its…

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andrea34

4th Nov '19

Please can you include £TM17 taking into account both the trading update but also the CFO departure last week?

Enjoy Japan, I hope you post some photos on Twitter... or even one or two on here!!

jwebster

Zoo Digital (LON:ZOO)

Interims today. Overall revenue down but explained by a drop in legacy services partially offset by new lines.

I don't hold ZOO but was looking at their growth story, which makes sense around serving the rapidly expanding video streaming market.

They talk in the commentary about negotiating with potential clients but no specifics, a bit jam tomorrow.

Cash flow looks more the worry, burned through 1.2m to reduce cash from 1.8m to 0.6m. Although 1.46m used was decrease in trade payables. State they have unused credit facilities, but not how much, and also they expect to return to positive cash flow in H2.

Share price tipping this morning opened at 82p now 77p as I write.

Not tempted in buy in, only that I don't know if their product is good enough to be the market leader and land the biggies - like Apple, Disney.

[edit] now 75p...

hagon

"The great thing about shares analysis & investing, is that all you need is a laptop and wifi, and you can work literally anywhere on earth"

Did you copy what Paul said on Friday or did you just happen to write exactly the same sentence as him?!

InvestorJohn

Lol he was only joking about Japan! In reality he is somewhere under a dull UK/Irish Sky like the rest of us!

No harm in dreaming!

ezlifeme

Hagon - Read the postscript at the footer of Grahams intro

brianbathgate

Team17 looked good to me but market not over impressed!

Grrrrrrrrr

£TM17 are currently up about 4%, but it has enticed somewhat bigger traders out now who are all sellers. The update sounds good... I'm just wary of the CFO going.

mojomogoz

Zoo Digital (LON:ZOO) is interesting business...but has persistently been jam tomorrow but with a doggedly supportive shareholder base IMO as it straddles a beautiful narrative that it is the disruptor like an Uber or Amazon to established old industry (localisation) that chugs inefficiently along unable to keep with the fast changing world that is OTT content production for likes of Netflix which is itself an exiting growth area with many others jumping in (inc big studios like Disney going direct OTT).

Nevertheless, money is tight and the forward valuation is high even with high expected short term revenue growth. So its seems like Zoo will need to do extremely well in H2 2020 results to just hold its ground in price terms rather than seek new upside and that means disappointment opens up downside - so a price distribution that over 6-12 mths must have a skew to downside.

It would seem that H2 20 basic achievement would be organic strengthening of cash position and without that there's an equity issuance. Given valuation and pregnant expectation I'd guess that share price will also decline if Zoo doesn't actually exceed growth expectations. The H1 20 interim must be the last hope results?

I've looked at Zoo in the past but I'm not expert. Anyone that has a more involved view I'd be interested in your view about the network of freelancers used for localisation and the associated tech platform (ZOOstudio) and the training requirements and scaling limitations of this setup. Its a great concept and the value potential is clear but there must be a high inertia element to scaled adoption of this novel system particularly for dubbing. Some questions/issues for those that know Zoo well:

1) The content provider looking for localisation services has a lot of familiarisation and internal training work to do with Zoo kit and approach to use it at any sort of reasonable scale

2) Zoo has been channelling its resources into technological innovation but it may now need to focus on providing much more client support. It may need considerable more clients and sales team people to properly insert itself into the opp it has created

3) Freelance voice actors require training and familiarisation....obvs the cost and time of that will be displaced near fully on to them

4) Overall, there's a high chance that no matter how great the long term benefits are of using Zoo there is a really sticky and awkward adoption process.

5) Given the high barriers content providers will feel to adopting Zoo they will need big inducement. That probably has to start with price to get them on board. But Zoo needs margin ASAP and lacks the financial depth to discount to attract

If correct this implies there is a quite a j-curve effect to systematic adoption from clients as they need to adapt, familiarise and train themselves at a time when they are probably already quite stretched and general talent feeling thin as there are so many competitors moving into the space to challenge Netflix (who's financials are dodgy and must be vulnerable to studios like Disney or highly profitable company like Apple being able to financially outplay and strangle them).

On balance, I think Zoo will need to raise a decent amount of cash to realise its growth potential so as it can develop deeper client team. The narrative is nice and this may happen at a higher price than here (75-80p) particularly with good newsflow and a little more revenue growth...but that revenue growth has been mañana'd quite a lot already with exogenous factors blamed...whereas as it may be that its already adoption probs highlighted above that are holding back.

EDIT - additional point

I get the sense that the company struggles to afford its current headcount (there was a comment in interim re keeping people even though some sales delayed etc)....looking at RNS it seems like there may be an element of equity issuance in lieu of cash reward. This last point by me might be a bit unfair but just adding for fullness

Graham Neary

Sorry to disappoint you Andrea!! G

TamzinPiworld

Proactis Holdings (LON:PHD) FY19 results overview video by Tim Sykes, CEO. (Following last week's results.)

Housemartin2

Re Duke Royalty (LON:DUKE), so nearer 8% borrowing cost not 9%. I don't see that makes a material difference to Graham's original point about investment margin being tight ?

Steve L

Please could you take a look at today's finals from Lokn Store (LON:LOK) if you have chance?

Getting you in the mood for Mello, Leon's presentation from Mello May 2019.

Leon Boros: Becoming … an ISA millionaire against the odds – Mello May 2019

Leon gives insight to his own investing journey, and how he’s achieved 21.5% CAGR since 2003. He analyses how investors can achieve those returns. Citing the winning formulas of the best investors, gleaned from research by Lee Freeman-Shor, in the book The Art of Execution. Lastly, he covers his rationale on Arcontech (ARC), and why he thinks this stock has the potential to continue his outstanding performance.

slopsjon

Those sells are in fact buys. You can buy @ 309p which is below the mid of 313p so they get logged as sells.

douglas1964

Well bang go my profits on 888 Holdings (LON:888)

Group of MP’s have announced they want online casinos to have a £2 limit to bring them into line with bookies FOBTs.

888, GVC , Flutter, William Hill and Rank all getting hit just now.

I know Mr Neary is a holder and one of the main reasons I bought.

Hope it’s not too painful Graham

Thanks for the comment Douglas. 888 is 3% of my portfolo so a 10% drop is ok. Thanks for pointing out the bad news - hope you are ok, too. G.

rmillaree

888 Holdings (LON:888)
It's tricky one to work out how much this might affect 888 - as long as the £2 limit is restricted to slots i would say that is manageable - also not allowing bods to use credit cards to deposit is a sensible pay - not sure what % of bods do use credit cards but if one doesn't have cash in the bank it seems fair enough that one shouldn't be using debt to fund ones gambling fun.
I think overall it's not the end of the world - 10% drop seems about right - perhaps an over reaction - until we get further quantification.
Note the shareprice for 888 is back at the level it was 10 days ago - so todays share decline is only giving back the short term gains of the last 10 days - rather annoying though for anyone who was about to cash in their chips though at the higher level.

Snoo

Quite a painful drop for the gambling companies (I own 888 Holdings (LON:888), very lucky that I took some out last week on the share price strength, but still have half a position).

The danger is, government wanting equivalence for limits online being the same as the FOBT - ultimately that would benefit society (IMO) at the expense of these gambling companies profits. I did think a potential loophole for the betting shops would be to simply turn part of their shops into internet cafes, except the computers would be big touch-screen versions which were restricted to only playing the operator's website.

The credit thing is a very sensible measure: unbelievably, you can fund a gambling account via Paypal without having the money in there, as Paypal collect via direct debit.

Question is, then where does the limits end? It could all become a bit draconian.

Think it is important that these gambling groups diversify into other products and fast, I have been surprised that 888 has not been picked up yet.

ianbush

5th Nov '19

Team 17 (tm17) - I was interested in buying this one - but so many recent IPOs have come undone, added to the fact the CFO leaves after just one year presumably making all her share options worthless (?), throws up many questions! Think I'll sit this out and see what happens....?

Small Cap Value Report (Mon 4 Nov 2019) - TM17, AUK, ZAIM, DUKE, KGH, ZOO, LWRF, DFX, MTC

Team17 (LON:TM17)

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Graham Neary

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