Small Cap Value Report (Mon 9 Sep 2019) - TENG, FLTA, UPGS, MGP

Monday, Sep 09 2019 by

Hi, it's Paul here.

Here is the placeholder for Monday's reader comments.

I'm on the afternoon shift today, so estimated time of completion here is 5pm.

Update at 16:36 - today's report is now finished.

Ten Lifestyle (LON:TENG)

Share price: 119p (up 3.5% today, at 11:57)
No. shares: 80.65m
Market cap: £96.0m

Full year trading update 

Ten Lifestyle Group plc (AIM: TENG), a leading technology-enabled lifestyle and travel platform for the world's wealthy and mass affluent, is pleased to announce the following trading update ahead of its preliminary results for the year ended 31 August 2019.

I was deeply unimpressed with the figures, when reviewing this company after its profit warning here in Nov 2018. The share price has since more than tripled in less than a year. This seems to have been driven by a series of contract win announcements, and a global roll-out.

Looking briefly at its interim results for the 6 months to 28 Feb 2018, revenues were up 24% to £21.5m, but it remained loss-making, with an adjusted operating loss of -£2.9m. Cash was falling quite quickly, with £13.2m remaining. I'm remain not at all impressed so far.

Today's trading update -

The Board expects to report Net Revenue1 in line with  market expectations2, whilst it is anticipated that the Adjusted EBITA3 loss for the full year will be ahead of market expectations.

Cash burn - has improved dramatically from H1 to H2. But should a company valued at £96m really still be cash-burning at all? -

The year-end cash balance will be c.£12m with no debt, representing an overall reduction in cash of c.£1m in H2 compared to an overall reduction of £7.5m in H1.

Outlook - its pipeline of new business remains strong.

My opinion - this business appears to be valued on the basis of hopes of further expansion, and breaking into profit in future. Therefore I think prospective investors would need to do more research on its services, and how they compare with competitors.

It's signing up some impressive customers (banks mainly). Also, H2 looks to have been a big improvement on H1.

It might be one to keep an eye on, but in current highly sceptical markets, I really cannot understand why this jam tomorrow…

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Ten Lifestyle Group Plc, formerly Ten Lifestyle Holdings Limited, is a United Kingdom-based technology enabled lifestyle and travel platform company. The Company is focused on providing direct access to cultural, gastronomic and travel service. The Company offers a range of platforms such as Ten platforms Ten MAID (Management and Information Delivery), Ten Data, and Ten Content. Ten platforms enables user to access all the benefits of lifestyle concierge in the palm. Ten MAID is the repository of the Company’s knowledge-based, booking system, workflow, performance management, CRM and Management Information reporting infrastructure. Ten Data is focused on leveraging technology and delivers reporting, analytics, insights, and predictive modeling to stakeholders within and outside the business. Ten Content is the editorial and personalized/targeted communications. more »

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Filta Group Holdings plc is a provider of various services to national and independent commercial kitchen operators and owners. The Company's principle service is FiltaFry, which is the micro-filtration of cooking oil, the vacuum-based cleaning of deep fryers and full Fryer Management. Its business operations are within the United Kingdom and the United States. The United States operations are operated as a franchise network, while the United Kingdom activities are operated under both franchise and direct sale business models. In addition to FiltaFry, Franchise Owners offer other fryer management services provided and managed by it, including waste cooking oil collection and removal (FiltaBio) and the supply of cooking oil (FiltaGold) and non-fryer related kitchen services, including the provision and servicing of moisture absorption panels for refrigeration units (FiltaCool). Its drain-related services include live bacteria drain dosing. The Company has over 180 Franchise Owners. more »

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UP Global Sourcing Holdings plc is a United Kingdom-based owner, licensee, designer, developer and manager of a series of brands focused on the home. The Company develops, designs, sources and distributes a range of consumer products, focused on six product categories: small domestic appliances (SDA), housewares, audio, laundry, heating and cooling, and luggage. Its owned brands include Beldray, intempo, Constellation and Progress, and its brands under license include Salter and Russell Hobbs. It also offers products under brands, such as American Originals, George Wilkinson, Giles & Posner, Inspire, Portobello, Prolectrix and ZFrame. It products are sold to a cross-section of both national and international multi-channel retailers, as well as other national retail chains. It sells its range of products to over 300 retailers across approximately 40 countries. The Company caters to retailers, supermarkets, general retailers and online retailers. more »

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40 Comments on this Article show/hide all

Laughton 9th Sep 21 of 40

Re online clothing and the returns problem, surely it can't be that difficult to come up with a low cost sensible solution?

2 minutes consideration has come up with - adding a very large colourful tamper proof label attached to the front of every item. If the item is returned with the label still attached and not tampered with then full refund - no problem. If the label has been removed then item considered as used.

How many customers would want to attend an "occasion" with a label saying something like "This item purchased from SOSANDAR" or similar? Not very facebook friendly I would have thought.

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dustyie 9th Sep 22 of 40

SANDERSON GROUP Sanderson (LON:SND) shares are suspended this morning pending an announcement.
Anyone know what going on ?

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Roy Edwards 9th Sep 23 of 40

In reply to post #511436

Will be moving off the market after agreeing bid

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Fishcake 9th Sep 24 of 40

Sanderson have been taken over at a price of 140p

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thirty fifty twenty 9th Sep 25 of 40

In reply to post #511406

re Sosandar (LON:SOS) - I remember hearing this before from them about the returns.

To me it seems there is some lacking in logic to say c.50% returns is no problem and it is just a normal cost of doing business, then to say we are focusing on developing other products as a priority which have a lower returns rate. Surely that implies that they see the costs of the first business as being less than ideal. It implies they are want to report a lower cost of returns ratio than last year, when the reality will just be a different product risk.

I fully understand the logic for them to diversify and develop new products etc...
but the reason for that should be for the benefits of diversification.

disclosure - I have no position

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Zipmanpeter 9th Sep 26 of 40

In reply to post #511421

Clothing is a highly competitive business.  It will solve the returns issue over time.

Poor retailers who can't control either fraudulent or legitimate costs of returns (like any other cost) will go simply go bust.  This cost includes both the direct cost and the overhead/ distraction it causes

Better retailers will find solutions to cut fraud (as above tamper proof sticker, Social media checks) and/or simply price to cover it - especially as data analytics improve to identify aberrent behaviours.  This will especially true of the most loyal customers (eg free returns or your returns cost credited against your account if you spend over £XXX pounds/yr).

The best retailers will even find solutions that offer sustainable advantage from such areas eg Next's online cross subsidy of its stores for returns or solutions that ensure good fit eg getting customers to share a 3D scan of your body and recommending fit.  

Niche businesses will spring up to meet the remaining consumer need  eg rent for-the-night-dress companies.

What's left will be small.  But online is still, big picture, in its early days.  Market needs time to sort it.

Disc.  I hold £SOS and £NXT

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timarr 9th Sep 27 of 40

In reply to post #511421

2 minutes consideration has come up with - adding a very large colourful tamper proof label attached to the front of every item.

Unsurprisingly the fashion industry has put more than a couple of minutes into the problem. They're all over fraud prevention tags to defend themselves against wear and return fraud - or wardrobing, as it's known. They work, we know this, but there are issues.

At the high end, where fraudsters want expensive clothes to wear to an event without having to pay, then the monetary case is relatively straightforward. However, the problem is that with an estimated wardrobing cost of around 4% you don't have to put off many of your genuine high end customers to lose out overall. Real customers don't appreciate receiving an expensive item which they then need to try on with an awkward ribbon or tag and then have to carefully remove themselves. And if they get the removal wrong they can't return the garment. 

At the low cost end then it's more straightforward - the cost of effective fraud prevention tags can be relatively high compared to the actual clothes and on a low margin business that can be counterproductive. Hence why businesses are resorting to analytics to try to identify and block serial fraudsters, rather than using fraud prevention tags.

It's tricky, but in a low margin business where a misstep can severely damage a business it's understandable that companies are cautious about how they deal with the problem.


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Aislabie 9th Sep 28 of 40

In reply to post #511411

I was also surprised by the market’s enthusiasm for Filta Group (LON:FLTA) . Once you get past the EBITDA, “adjusted”, “underlying” stuff the stark fact is that the final net profit after FX adjustment is £336k against £809k last year.
Also the cash is interesting in that it is heavily influenced by an astonishing drop in DSO. Despite having almost doubled sales the H1 receivables are actually down from the year end. This is generally laudable, but it is very surprising and requires a bit more understanding than I have so far figured out from the numbers provided. It could reflect a slowing of sales towards the end of the half year but this would probably have to be disclosed.
In fact for a small fairly straightforward company there is a lot going on here, with the sales in several markets and (presumably) lumpy receipts for franchises.
Intriguingly Filta also states in the notes that some accounts have been agreed to settle on extended terms.
(I do not hold)

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Richard Goodwin 9th Sep 29 of 40

In reply to post #511271

I took the reduced H2 weight to effectively be a profit warning in the sense that they are less confidence about H2 than previously...

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hayashi22 9th Sep 30 of 40

In reply to post #511421

What is it's underwear...?!

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abtan 9th Sep 31 of 40

In reply to post #511501

Hi Richard

Re. Air Partner (LON:AIR) that's certainly an interesting way to look at it, thank you. I always fear that my bias as a holder makes me miss what might actually be happening.

I was just going through my notes and the company updates for this year have been as follows:

1) May 2019 - H1 is "slightly ahead of prior year" (adj. PBT in H1 of 2018/19 was £4.2m)
2) June - H2 will be less than H1. Obviously not great, but the H1 result alone was enough to make me hold my position.
3) Today - H2 will be the same as H1

So if we assume adj. PBT will be at least £4.2m * 2 = £8.4m then we're looking at quite a good result vs a company with an EV of around £30m (excluding customer cash).

And even if there's a miss on that £8.4m, that still seems like a remarkable result vs the company's valuation.

It seems to me that last year's accounting mishap continues to hold this company's share price back, but having just written the above I'm actually minded to top up.


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Laughton 9th Sep 32 of 40

In reply to post #511506

Well I did think of that but decided that they probably (hopefully) don't take returns on underwear to then resell.

In any event with a large label/tag I think the comfortability factor might be more of a deterrent than a missed photo opp.

Of course I could be wrong.

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dustyie 9th Sep 33 of 40

In reply to post #511456

Thanks , I had a small holding in Sanderson and i was hoping for a second bidder. I missed there last announcement on delisting dates, Looks like i should have sold out, instead i have wait for my money :(

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mojomogoz 9th Sep 34 of 40

Paul likes UP Global Sourcing Holdings (LON:UPGS) and has upgraded from trash to decent as a company - praise be :)

My take is valuation is currently unkind and could be a few rating points higher as both margin and growth prospects decent. But there's perhaps a bit of caution weighing against it with Brexit uncertainty (aka brexshit) plus a potential recession brewing in its new growth market Germany. As a seller of decent but cheap stuff this is not necessarily too bad an environment for UPGS. In addition, they haven't updated on Russell Hobbs license...they've been confident in past they keep it. Would be a blow to lose it but not a killer.

Some views:
1) Its higher quality business than its given credit for with a margin it can defend. Why? Primarily as its not just import and resell business. Its active in product design and quality management with meaningful quality management presence in China. They claim, and I find believable, that they out do the big guys in this production chain management stuff and the independent quality assurance (aka box tick) firms. Margin is also protected by fact they don't make themselves an explicit part of retailer supply chains by agreeing future purchases etc. They provide product and the retailers order what they want. Means that they control their margin much more (at the expense of less demand visibility)

2) The growth opportunity in UK and Europe is still considerable

3) Senior mgt team with lot of experience and worked together for a while

4) Have developed scalable in-house procedures and systems critical to efficiently growing trading business like this. They integrate and comply with a lot of big retailers well and efficiently

5) In-house design team which has been successful in hitting right vibe so far (ie most product they sell is designed by them with aim of quality and style for low budget - John Lewis feel at Asda price)

6) Been around a while now, CEO has presence/charisma and has probably reached a stage where he gets time with big guys when he needs not a struggle to open doors

I don't now Paul but I feel that if he net senior mgt inc CEO he would be v impressed with them as retailers.

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AndrewHemp 9th Sep 35 of 40

In reply to post #511301

An interesting view I heard was that some people order more than they need so as to bump their order value up into the free delivery category for some online retailers.  They then just return the items they don't want. It seems there are many issues for returns, which was one metric the High Street had an edge over online.  Looking at Sosandar's website they promote Free and Easy Returns on the main menu tab, so clearly they feel it helps alleviate a barrier to purchase.

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tightfist 9th Sep 36 of 40

In reply to post #511536

I listened in at the CEO presentation at the last Mello and had a chat with the CEO afterwards - quite impressed but did not take a position. Was interesting to hear about the role they play in assist BigFish to source in China. Wondered about the future of their own China sourcing but trade wars cannot get that far? IMO they are in the right segment if times get tough - in the UK or Germany. 

Was also interested in their recent acquisition of the KleenEzE brand - I saw at a distance the amazing resuscitation of an old, exhausted brand that I previously could see no value in!

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Graham Ford 9th Sep 37 of 40

Regarding the clothing returns discussion, how does this affect logistics complexity?

I understand that outsourcing of the logistics operation is common, e.g. Sosandar (LON:SOS) use Clipper. However, with the need for the logistics company to check the returned items for damage, carefully refold and repack them (and may be iron them too), and finally put them back into stock as “new” there is a significant level of complexity. The logistics company is in effect running a repacking factory that is mission critical for the clothing company. It is no longer simple box shifting.

This strikes me as being somewhat risky. Outsourcing is fine and makes a lot of sense for non-core activity but 100% outsourcing of your repacking factory would seem risky for a 100% etailer with a high returns rate.

If something goes wrong at that logistics business over which you exercise very limited control you are potentially toast.

I can understand that an etailer may think that design is their competency and logistics is not, but if fifty percent of your business is repacking your own product because of the ridiculously high returns rate in this market segment shouldn’t that also be a core competency?

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Wimbledonsprinter 9th Sep 38 of 40

In reply to post #511546

Re UP Global Sourcing Holdings (LON:UPGS) I saw a presentation at Mello too. I think they did more than one but the one I saw was by Andrew Gossage (managing director) - not by Simon Showman (CEO). Gossage’s presentation was impressive.

I have owned this stock briefly, as a punt, but sold out far too soon a long time ago. My main concern around the company was that the business seemed like a lot of hard graft (getting product into retailers, finding lines that sell and negotiating with Chinese suppliers). Not too dissimiliar from Showman’s original job as an auctioneer.

Management (inc Showman and Gossage) had become rich following the IPO in March 2017, which raised no new money for the company but was just a sell-down by existing shareholders. Would management still have the same drive post IPO? But the recent recovery in the financials definitely gives confidence that management is still very much focused.

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mojomogoz 9th Sep 39 of 40

In reply to post #511561

UP Global Sourcing Holdings (LON:UPGS) - The graft and complexity you reference is partially a moat. Likely, the hardest thing for newbie to replicate is top level relationships with the right people in retailers

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JohnEustace 9th Sep 40 of 40

In reply to post #511551

It's common for online sellers to use specialist reverse logistics providers. That allows the main business to focus on sourcing and shipping product.  Often the returned product gets sorted and assessed by the return logistics provider and they sell it on through secondary channels like eBay or clearance outlets rather than it being injected back into the main supply chain. But at 50% return rates for clothing I would agree with you. 

When I discussed this topic with BooHoo management (a couple of years ago now) they were very focussed on controlling and handling the whole thing themselves.

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About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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