Small Cap Value Report (Mon 5 Mar 2018) - BRK.B, ZOO, MYSL, ERGO, GRC, ORCH

5th Mar '18 by Graham Neary

39 comments 16446 reads

Good morning! Stocks on my radar so far today, guided by your suggestions, are:

Zoo Digital (LON:ZOO)
MySale (LON:MYSL)
Ergomed (LON:ERGO)
GRC International (LON:GRC) (new ticker)
Orchard Funding (LON:ORCH)

1:30pm: Edited this list in response to reader requests.

Berkshire Hathaway ($BRK.B)

(Please note that I have an indirect interest in Berkshire Hathaway)

I finally got around to reading the Berkshire Hathaway annual letter to shareholders this weekend (it had been released the previous weekend). You can find it at this link.

The full dissection of this letter and the accompanying results would be worthy of an article in its own right, but the most important metric is perhaps the $116 billion in cash and short-term T-Bills held by Berkshire at year-end 2017. That is very significant, even for a company with $700 billion in assets and $350 billion in equity. Cash and T-Bills have increased from $86 billion a year ago.

The reason for this is that Buffett, Munger & Co. are in a mode of maximum caution, warning that valuations are high and that exuberance is irrational. The only stock they seem to have bought much of over the past year is Apple ($AAPL) - and they did buy lots of it, about $14 billion worth.

Even for those of us far away from the US and trading in small-caps rather than Buffett's big-caps, I think it pays to be aware of general conditions. And it can be very painful holding cash in your portfolio, when there are lots of interesting stocks you want to buy. But if it's good enough for Warren, then it's good enough for me.

Zoo Digital (LON:ZOO)

Share price: 77p (+12%)
No. of shares: 74 million
Market cap: £57 million

Trading Statement

A nice update from this digital agency:

The Company is pleased to announce that growth has continued into the second half of the financial year with full year revenue expected to be at least $28m (year ended 31 March 2017: $16.5m). Adjusted EBITDA* for the full year is expected to be ahead of market expectations and at least…

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andrea34

5th Mar '18

Many thanks Steve, and Will too for helping me out - both links a useful read for me.

Interesting to see GAW heading into the FTSE-250... not such a small cap now!

WDWombat

Just for info and slightly on the Warren Buffet trail Ruffer has released its interim report today. They are stuffed with index linked long-dated gilts and clearly very cautious.

Tortoise investor

I remain sceptical about MySale (LON:MYSL) as an investment proposition. The flash sales space is becoming quite competitive although it's possible there might be some consolidation. Brand Alley (through which I've made a number of purchases) last week purchased one of the smaller competitors: Achica. There are also more niche sites like SportPursuit and of course there is TKMaxx. Many brands also now operate their own "outlet" on their website e.g. Reiss. My worry is that brands will simply go to the website offering them the best margin which will mean that MySale (LON:MYSL) will not have much pricing power. Plus, as noted today, growth remains modest for an online store and it still didn't break even in the latest results. I'd be more interested to know what it plans to do with that pile of cash as it could potentially grow through acquisition or developing a new business line. It attempted to create its own clothing range called London Chic but this was quietly shelved.

Graham Neary

re: Ergomed (LON:ERGO). Nice suggestion, thanks Jesse.

harvs19

I asked my mum (mid 50's) to check out Sosandar recently and let me know her thoughts. Her initial reaction was luke warm, wasn't overly impressed so I decided to hold off on the shares. Having just returned from holiday and seeing my mum she told me she ended up buying a couple of bits and was pleasantly surprised. Items arrived in a nicely presented box wrapped well and most importantly she thought the clothes were of really good quality and decent value. Slightly more expensive than the likes of H&M etc. but worth paying the little bit extra for the better quality in her view. She told me she was going to buy a few more items but were sold out which is obviously a good sign for demand. I'm tempted to open up a small position but may end up waiting for better financial info upon results.

Asagi

I am shorting MySale.

This looks like one that came to the market well before the business model was proven.

Revenue growth +11%.

net cash balance at 31 December 2017 was A$8.3 million slightly down versus A$8.9 million at the beginning of the period (H1 FY17: A$29.1 million)

last year's H1 saw the net cash increase on the prior year end. It looks as though the company has recently changed its PR and added a joint broker, perhaps with a view to a fundraising?

MySale (LON:MYSL) shares trade on 81x forecast earnings for the year ending June 2018, falling to 53x for the year to June 2019.

By comparison, Joules (LON:JOUL) is profitable, dividend paying and has a net cash balance. Last time out, the company reported 20% online revenue growth. The shares trade on 27x forecasts for the year to May 2018.

Even an established pure-online company like ASOS (LON:ASC) is still reporting 30% sales growth.

Asagi (short MYSL)

mammyoko

Re Revolution Bars (LON:RBG) from last Friday - this from Langton Capital

REVOLUTION BAR GROUP – H1 NUMBERS – ANALYSTS’ MEETING:
Following its H1 update this morning, Revolution Bars Group hosted a presentation for analysts and our comments thereon are set out below:
Headline Numbers:
• A strong end to the period helped edge like-for-likes for the 26 weeks up by 0.4% (+1.9% for the 27-week period, which includes New Year’s Eve).
• Sales in the four weeks between 4 December and 31 December +5.9%.
• That said, the overall trend over the past four years has been one of moderating like-for-like sales growth.
• Revolution faces the same cost headwinds as everybody else – staff costs increased by £600,000 and rates increased by £500,000.
• Four new venues opened in H1, all trading ahead of expectations (Belfast, Solihull, Putney, and Inverness).
• Returns from venues open for a second year averaging 37.3%, with Belfast performing particularly well.
Exceptionals:
• There are some £9.5m of total exceptional charges in the period and, since this is the difference between an adjusted operating profit of £6m and a reported operating loss of £3.7m, we view this as worthy of comment.
• Some £2.2m of fees have gone towards M&A activity. Considering Revolution was the company being bid for, it raises the question of why it has been left footing this bill. Surely the onus is on the bidding company?
• It also seems a lot to spend on corporate advice, considering the deal was botched and led to the resignation of the group’s CEO and CFO.
• One might argue that the £705,000 charge related to changes in executive management is a part of normal business and should be included in the adjusted figure.
• The £5.6m onerous lease charge casts doubt on the group’s claim of a ‘self-funding roll-out’.
Balance Sheet etc.:
• Starting net assets of £35.2m minus total comprehensive loss of £3.4m minus a £765k share-based payment minus £1.65m of dividends gives ending net assets of £29.4m on a market cap of £85m.
• Given market conditions, it might be prudent to keep dividends flat for a year or two. Revolution has taken on £3m of debt, suggesting this dividend is not being financed from profits.
• On a related note, if Marston’s and Greene King were not paying dividends already they might think that their profits might be better deployed elsewhere.
• For example, Enterprise Inns Group and JD Wetherspoon continue to buy back shares at these levels.
• Debt is up £3m to £10.5m and will go up more towards the end of the year as RBG sets about three new openings. This suggests, contrary to what management says, that the group’s roll-out is not self-funding.
• £5.6m exceptional charge on onerous leases following ‘more robust analysis of trading performance’ has not resulted in plans to close any bars.
Outlook:
• Two new Revolucion de Cubas opening in H2 (Birmingham and Newcastle) and a minimum of six sites opening in FY19 (including Bristol, Glasgow, and Southampton).
• Headwinds will remain, but the group is implementing cost efficiencies (including improved labour scheduling and a new four-year supply agreement with Matthew Clarke), which should deliver results in FY19.
• Revolution’s food offer should improve once incoming Food Director Simon Dobson gets his feet under the desk – at present, food is just 15% of RBG’s sales.
• With incoming CEO Rob Pitcher rounding off the picture, shareholders will be optimistic of some stability at the top.
Langton View:
• Revolution Bar Group has maintained the pace of its cash-fueled roll out and Revolucion de Cuba appears to be hitting its stride. Its pipeline is secure and the sites it picks offer a degree of security in that they are big sites, often in Community Impact Zones, where it is harder to get a license and more difficult for landlords to find appropriate tenants.
• That said, the sector’s headwinds are fierce, and the group’s overall like-for-like trend over the past five years has been of moderating increases. Management says the group is focusing on ‘premiumisation’ (aka ‘making things more expensive’) but that the bulk of like-for-like sales growth is coming from volume. Regardless, we note the possibility of Revolution ‘maxing out’ a la Restaurant Group and hitting a price point that no longer offers value for money.
• The group’s image as a standalone company has been tarnished somewhat by a botched merger with Deltic. If Revolution would allow itself to be acquired for c200p, what does that say about the group’s perception of its own value?
• Further concerns might be raised about the group taking on debt to pay dividends, the fact that it will take on more debt towards the end of the year to help finance three new sites, and its significant £5.6m onerous lease charge.
• Considering the above, we are cautious about the company’s prospects in what is proving to be a hostile environment for the majority of operators.

re: £GRC. Thanks Damian, I've included it in the report.

Damian Cannon

Thanks Graham. This is a pretty good summary too: https://www.sharesmagazine.co.uk/news/shares/rws-chairman-floats-cyber-security-services-firm-grc-and-its-shares-immediately-soar

Hi Gus, thanks for suggesting MySale (LON:MYSL) earlier. G

hayashi22

Re MySale-interesting use of tidbits rather than titbits! Both apparently correct though the former more preferred in North America.I like titbits more though...........

mojomogoz

Class used rather crassly below to simplify and explain. Please do not be offended. My view on who Sosandar (LON:SOS) may appeal to could be misperceived

My very middle class wife (high status job in Mayfair) hates Sosandar (LON:SOS) - she typically pays much over their price point. Mind you, she thinks I'm out of my tiny mind for holding SCS (LON:SCS) (from 150p and not current elevated price!)...I tried explaining council house furnishing chic but she wasn't having it...she'd never go to DFS Furniture (LON:DFS) either...well, maybe if she had to buy something for the kids when they move into their own place / student digs.

My working class sister likes SOS.

I am no expert in ladies fashions but the clothes and the vibe looks like something that would appeal to my cohort of relatively aspirant working class aunts and cousins when they want something nice. The good morning vibe is right on track too IMO. As I said before I can imagine Sosander becoming a sort of hybrid fashion-media sort of thing...although there is a risk they lose focus in it too.

FREng

At first sight, Zoo Digital (LON:ZOO) seems to be in the same business as Keywords Studios (LON:KWS) but compares poorly on almost all headings in a Stockopedia comparison. (I don't hold either of them).

schober

It's interesting to comp[are how BRK/B has performed relative to the SPY over the last 20y
https://tinyurl.com/y7lxrqv7

In the last 7 or so years, its followed the spy more or less

ricky65

Buffet has been under performing the S&P 500 since 2008

http://www.businessinsider.com/warren-buffetts-berkshire-hathaway-underperforming-sp-500-since-2008-2016-9?IR=T

Howard Marx

Ricky, that 2016 Business Insider chart suggests to me that Berkshire Hathaway had been underperforming since 2013, not 2008:

Moreover the recent Berkshire Report & Accounts reveal a 53 year compound return in book value of 19.1% per annum vs 9.9% for the S&P500.

It's hard to know what the future holds for Berkshire as Buffet steps back from day-day involvement, but the historic value creation has been unprecedented.

Hi Howard

You make a good point, as you said, it seems like the under performance started in 2013 rather than 2008.

As that article was 2016, it would also be interesting to compare the performance vs S&P 500 from 2016 to now.

timarr

6th Mar '18

A couple of points are worth making. Firstly Buffett himself has constantly reiterated the point that the sheer size of BRK means that it's going to be more and more difficult to outperform. Secondly the outperformance of the S&P500 looks suspiciously like a bubble - classically Buffett and Munger will hoard capital unproductively when they think the market is overvalued and then deploy it when the reversal happens.

Of course, this time it may be different ...

timarr

PeterW

7th Mar '18

Thanks John, that was super helpful.

https://www.fool.com/investing/2017/07/23/an-interesting-chart-about-berkshire-hathaway.aspx

I hadnt realised how big BRK was "..... the fifth largest market capitalization on the S&P 500, behind only Apple, Alphabet, Microsoft, and Facebook. I....."

The graph shows how Brk's performance has gradually been approaching that of the wider US economy over the last 40 or so years

Small Cap Value Report (Mon 5 Mar 2018) - BRK.B, ZOO, MYSL, ERGO, GRC, ORCH

Berkshire Hathaway ($BRK.B)

Zoo Digital (LON:ZOO)

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Graham Neary

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