Small Cap Value Report (Part 2 - 24 Jan 2017) - XLM, LAKE, MUR, KLBT, AVO, PRSM

Tuesday, Jan 24 2017 by

Good evening!

Many thanks to Graham for publishing excellent reports today & yesterday. I took a long weekend break to visit friends & extended family in Warsaw. Unfortunately my flight back yesterday was cancelled, so we had an extra day there. No hardship though, I love visiting Warsaw at any time of year - it's a really up & coming city. Also they extend Christmas until the end of January, so all the decorations are still up, and there's skating & mulled wine in the (rebuilt) old town square. Better still, it only cost £173 per person, for BA flights & a 5-star hotel. Service is a little morose, but that's just their way.

I've just got time to briefly report on a few more small caps that Graham didn't get time to cover today.


Share price: 110.5p (down 1.8% today)
No. shares: 200.4m
Market cap: £221.4m

Trading update - for the financial year ended 31 Dec 2016.

The key bit says;

XLMedia continued its strong performance in 2016, with revenues up 15% to $103 million (2015: $89.2 million) and adjusted EBITDA1 up 21% to at least $34.5 million (2015: $28.4 million).

The company doesn't say whether this is above, in line, or below expectations, which is a little unhelpful. From the upbeat tone of the commentary though, it sounds as if the company is pleased with its performance.

Outlook - Directorspeak sounds positive;

The Board believes that the Group is well positioned for further growth and the current financial year has started positively. The Board looks forward to continuing to execute on its strategic plan and looks to the future with confidence.

The Company expects to announce full year results for the year ended 31 December 2016 in March.

Ory Weihs, Chief Executive Officer, commented: "During 2016 we made significant progress having now established ourselves as a dominant player in the performance marketing arena. We continue to execute our strategic plan whilst implementing our know-how, expertise and technology in new business verticals and key end markets. We are very proud to have delivered another record year of performance in 2016 and look forward to reporting our full year results in March."

My opinion - this is a tricky one, as based on the figures alone, everything looks fantastic.

The Stockopedia computers love it, with a StockRank of 97, and the usual graphics below point to…

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XLMedia PLC is the United Kingdom-based online performance marketing company. The Company focuses on paying users from multiple online and mobile channels and directs them to online businesses who, in turn, convert such traffic into paying customers. The Company's segments include Publishing, Media and Partners Network. The Company owns over 2,000 informational Websites in approximately 20 languages. Its Media division acquires online and mobile advertising targeted at online traffic with the objective of directing it to its customers. It buys advertising space on search engines, Websites, mobile and social networks and places advertisement referring users to its customers Websites or to its own Websites. It manages marketing partners, whose role is to direct online traffic to its customers. Its partner program enables affiliates to have a single point of contact for directing traffic. more »

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Sureserve Group PLC, formerly Lakehouse plc, is an asset and energy support services company. The Company is engaged in the construction, improvement, maintenance and provision of services to homes, schools, and public and commercial buildings. Its segments include Compliance, Energy Services, Property Services and Construction. Its Compliance segment delivers a range of services to local authority and housing association customers, and it is focused on gas, fire, electrics, and lift compliance activities. Its Energy Services segment, via its subsidiary Everwarm Ltd., provides domestic insulation, energy products and advice for social housing landlords and the Scottish Government. Its Property Services segment provides planned refurbishment, repair and maintenance, and responsive maintenance for social housing providers. Its Construction segment delivers extension, refurbishment, rationalization and new build works in the education market, particularly schools. more »

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Murgitroyd Group PLC is a United Kingdom-based company, which is engaged in providing a range of intellectual property (IP) advisory services through its trading subsidiaries, Murgitroyd & Company Limited, Murgitroyd SARL and Murgitroyd LLC, which are European patent and trade mark attorneys. The Company offers a range of services, such as patents, trademarks, designs, utility models, global IP filing, renewals, searching, oppositions and appeals, copyright, domain names, European patent validations, translation, licensing, monetization, IP audits, litigation support, due diligence, patent drawings, the United Kingdom patent box and Italian patent box. The Company caters to a range of sectors, such as high-tech and software; life science, chemistry and pharmaceuticals; engineering; energy; consumer goods; business and financial services, and creative industries. It has approximately 10 offices across Europe, in the United Kingdom, Finland, France, Germany, Ireland and Switzerland. more »

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  Is LON:XLM fundamentally strong or weak? Find out More »

44 Comments on this Article show/hide all

AnonymousUser252054 25th Jan '17 5 of 44

I think XLMedia (LON:XLM) has run out of steam and I sold a couple of days ago, but their business model seemed reasonable to me. They run a lot of 'independent' websites which appeal to poker players etc. and XLM gets a lifetime percentage of all bets placed at very decent rates (c. 50% even) from click-throughs that lead to account openings on other companies' gambling sites. They can be picking up streams of income for years at relativey low cost. It could all be a big fat lie, I've no idea so it's definitely a gamble. Their divis are usualy late being paid which was annoying and they never replied to my email either, again not reassuring. But as BT reminded us today... (I won't complete that sentence due to risk of libel proceedings).

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apad 25th Jan '17 6 of 44

I looked hard(ish) to find out what their software approach is and why this might be some sort of a "moat". It's almost as if they are deliberately not saying what they do.
In principle I can see no reason why a decent spreadsheet cannot produce this functionality (although with a crap interface). So, I assume they produce some sort of rule-based program with a decent interface. I.e. nothing special.
If this assumption is correct then I can see nothing that would justify purchasing this company for any reason - I would not reach the stage of attempting a valuation.
Like you, people I respect are keen on the company - it is comforting to see a similar view to mine aired. I was beginning to wonder what I had missed, but can't be bothered to return to the issue.

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shipoffrogs 25th Jan '17 7 of 44

In reply to post #168508

"and XLM gets a lifetime percentage of all bets placed at very decent rates (c. 50% even) "

Shine - where did you get that from? Surely you mean "losses" not "bets placed".

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mkbrazier 25th Jan '17 8 of 44

I used to hold PRSM but sold under 400p when I thought the price had gotten crazy so I half agree with you. What you are missing is that they get paid upfront and so although losses are growing, they are break even at the cash flow level. As you will be aware, launching a new technology in the software industry is all about grabbing market share. Yes, eventually the competition will catch up but changing suppliers is a hassle (even for an over the top solution like Blue Prism). Therefore, costs are front loaded but each new customer will (hopefully) generate high margin revenue for multiple years.

The other key number to look at here is future contracted revenue which soared from 11.5m to 35.2m. Note that this represents a floor, as many customers are likely to increase number of seats as they get comfortable with the software (as has been the case to date). To understand why, it is worth looking at a few of the case studies on their website. Essentially, unlike an excel spreadsheet, the software is robust, secure, compliant and highly flexible and therefore has a wide range of applications withing a single organisation.

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Steve Hill 25th Jan '17 9 of 44

Regarding XL Media, I also owned XLMedia until this TU.
This RNS although factually correct is very, very misleading.
Revenues increased by 39% in H1 2016 & fell 2% H2 2016, there was absolutely no mention of this in the RNS, just a positive spin on 15% annual growth.
A company whose revenue growth goes from 39% to -2% in 6 months & does not mention it in its RNS is scary !!
Also FO sold a not insubstantial amount of shares late last year.
One thing I do not understand is why the share price has remained relatively resilient to this news, has no one else noticed this slight of hand ?

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iain1234 25th Jan '17 10 of 44

Yes, I agree with comments on Blue Prism. All they need on their website is some screen shots of their package or the user/programming interface so that we can get an idea of what it is they are flogging.

Any company that describes its software as a fleet of robots is just trying to mislead investors/customers. Robotic process automation is what you have in production lines, oil refineries or factory’s. If your were distributing an Access database query around your workforce you wouldn’t describe it a digital workforce or software robot.

Their website reads like an explosion at a IT Thesaurus printers;
‘addressing potential significant seasonal variations in operational demand’
‘on-premise enterprise deployment’
‘Process excellence engineers’
'identifies both inline process statistics and real-time operational analytics'

‘Drive meaningful BI and MI reporting’ anyone?

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Ramridge 25th Jan '17 11 of 44

In reply to post #168505

Hi Paul - XLMedia (LON:XLM) Can I question your statement that XLM notches up 80% operating margin?

Stockopedia shows 25.7% for year ending 2015, and the latest interims show 31%.

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Ramridge 25th Jan '17 12 of 44

Blue Prism (LON:PRSM) A couple of months back I took some time to look at Blue Prism in detail.
Basically their premise is that they can automate tedious back office repetitive tasks in the same way that industrial robots have taken over repetitive tasks in, for example the automative industry.

Well I have retired from a lifetime in the financial services industry and back office automation has been going on for well over 30 years. Premium renewals, bonus statements, direct debit collections, etc are totally automated and involve tens of thousand of transactions every day. The common or garden spreadsheet has revolutionised finance, accounting and actuarial departments by fully automating extremely boring data collection and basic analysis work.

So I struggled to see what else Blue Prism could be doing to squeeze out manual tasks and let in software robots. I went to their website and clicked on 'case studies'. There was only one entry and it didn't read anything like a proper case study.

So far, to me this is hype. The lack of decent revenues is just proof of lot of hot air and little real substance.

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mkbrazier 25th Jan '17 13 of 44

In reply to post #168538

I agree with your sentiment regarding the hype on their website. However, the vast majority of sales come through channel partners which include many impressive names so perhaps their website is not so important from a customer acquisition point of view.

My understanding is that the software simply automates repetitive computer based tasks that typically involve transferring information from one system to another. The best solution would obviously be to upgrade software to take away these manual elements but due to the complexity and customisation inherent in IT systems in large organisations, this is often not an effective use IT resources. There are lots of people currently employed doing this type of work either as direct employees or through outsourcing and so there are large cost savings to be realised if you can replace each one with a software license. Blue Prism's very well known and rapidly growing list of clients is testimony to this.

I agree that there doesn't seem to be much that is that groundbreaking about the technology but its simplicity may in fact be its strength. The solution is quick and cheap to implement and it doesn't require IT specialists to maintain and operate it. It is therefore highly scalable and whilst there is a risk that over time all software will be able to integrate seamlessly together (another reason that I sold out), this will take a long time in the case of specialist enterprise software solutions which are often one of a kind.

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mkbrazier 25th Jan '17 14 of 44

In reply to post #168547

You might want to also look at Automation Anywhere.

They are the major competitor and already have more than 500 large clients so are ahead of Blue Prism in this regard. It seems unlikely that so many reputable large companies would get caught out buying into a solution that is nothing more than "hype" but it is possible I suppose.

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tomstone80 25th Jan '17 15 of 44

In reply to post #168505

they have close to 80% GROSS margin on the publishing unit alone, not the whole company or the media sector. They have showed some of their sites on the last presentation such as,,, , and so on. Not that big a black box, just read the investor presentation on their site! :)
Saying they are breaking the law without actually knowing what they are doing sounds a little aggressive and out of place, don't you think?

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tomstone80 25th Jan '17 16 of 44

In reply to post #168535


Steve Hill, not true regarding revenue.
they updated the forecasts in September and upped EPS number. Explanation was trimming activities in the partner network that account for 1-2% of EPS as a whole as well as change to a small sector they are active in (utilities), but please remember they upped EPS alongside that!
Maybe others were paying attention 4 months ago and you were not?

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ls2g08 25th Jan '17 17 of 44

In reply to post #168499

Re XLM - Affiliate marketing businesses do tend to be secretive as I believe once you know what sort of sites are receiving significant revenue it is very easy to copy them and compete away the profit. Hence why I have no interest in investing in such a business. They have zero competitive advantage in their products alone. However if they have sufficiently talented individuals who are constantly seeking out new niches you could describe their workforce as generating a moat.

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pastybap 25th Jan '17 18 of 44

In reply to post #168559

It was an 11.30pm post. I think we can just ignore that comment and assume we will very soon see it disappear from this page. I agree with the general theme of the comment though, and a simple sniff test puts XLM on my bargepole list.

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bluecurve 25th Jan '17 19 of 44

Blue Prism (LON:PRSM) Their financial model initially attracted me to look at them, as many other investors simply do not understand the mechanics of an enterprise software business, so they can be mis-priced. You get paid cash up front for something that is "delivered" over a long period of time. You stick the cash in the bank, put the Deferred Income on the Balance Sheet and send some it to your P&L as Revenue each month. Hence, there's very little immediate profit from each new contract, but you're storing up a nice foreseeable revenue stream for the future.

This type of software is also very "sticky" if it meets expectation, so the future revenue could be quite stable. The future contracted revenue includes licence fees (which have ~zero cost of delivery) and support fees (which have some cost, but should be profitable). The trick is to be able to manage the other expenses to continue to grow the company and start to make a profit from those contracted revenues.

At the moment they are increasing spending massively on sales activities. This is mainly staff (salaries, commission, incentives etc). It seems to be generating growth and I liked the fact that they are paying out the sales people fully in year one - that leaves more potential profit in each contract for the future. If sales keep growing ahead of sales costs then they should become profitable pretty quickly. The test will come if sales growth starts to slow - how will management react then? The nightmare will be if they reach a point where sales have slowed and they're not yet profitable. Their only real expense is people, and it's a downward spiral once you start cutting. The shares would be worthless in that scenario.

I agree with Paul that the valuation is crazy, although I note that is currently on a p/e of 260! A reasonable P/E would be 30-40, and that implies £12-15m profit in the not too distant future at current prices. I suspect that's quite a few years away yet, so would expect this share to stagnate or decline until more good news comes out.

| Link | Share | 1 reply 25th Jan '17 20 of 44

Re XLM, while the valuation does look cheap by almost every metric, but the "beta" of the share is high, and the share price can be very volatile, which in turn justifies a lower valuation. A case in point was in the first week of December, when the share price suddenly and instantaneously dropped from 98p to 85p. The cause was an announcement that the FD had sold is shares to raise c£100k (I seem to remember the "Personal reasons" being mentioned, as per). I was outraged at the very thought that the FD's sale had cost us shareholders more than £20m so that he could have £100k. It was a bit of a bungled announcement from memory, middle of a Friday afternoon. I post on Boards only rarely, but was actively raging on a rival board and even writing to company...even sarcastically making the points that it would have been much cheaper for us beleaguered shareholders to have a "whip round" for his £100k rather than take a £20m hit to our holdings.

There are two points to my post. The first is to highlight that potential volatility, and you would expect to pay a lower percentage of earnings because of it, especially given the fast moving Regulatory environment.
The second point is to highlight that after taking two weeks to calm down in time for Christmas, I then checked my different portfolios and came to the stunning realisation that I didn't actually own any XLM!!

   Over the Christmas holiday I read a great book by Guy Thomas called "Free Capital" about how 12 Private Investors had made Millions by investing in the Stock Market. I am sure the book is familiar to many subscribers.  All 12 were interviewed, and many offered some real insights and helpful advice.  For me, the most pertinent advice of all was to "mix attack and defence"...and to spend as must time constantly reviewing your existing portfolio with "would I still buy this stock today if I didn't already own it" as much as the time spent evaluating new ideas to add shares in. Time spent on existing shares is more efficient as you (in theory!) know a fair bit about it, compared to the blank sheet of paper of evaluating completely new ideas.  

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steviej 25th Jan '17 21 of 44

Re: Blue Prism (LON:PRSM)

If we assume 50% revenue growth then the current price is 6 times sales in 2020, so they need to be going much faster than 50% to justify current market cap. Even a 30% year would see the share price crater.

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iain1234 25th Jan '17 22 of 44

Blue Prism (LON:PRSM)

For interest, when I have repetitive tasks at work or where the package I’m using doesn’t have the inbuilt feature I require, I’ve been using AUTOHOTKEY (its free off the internet). It takes about an hour (longer if you’re new) to set up and completely automates repetitive tasks across any software platform thats running on your PC. I’ve successfully used it to automate tens of thousands of mouse clicks and any other keyboard commands at the single click of a button. I’m sure it’s not as robust, powerful, easy or self-documenting as Blue bollocks offering but it’s free and simple to use.

I recommend it although it won’t ‘Drive meaningful BI and MI reporting’.....

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cg78riverside 25th Jan '17 23 of 44

In reply to post #168505

Been invested here since pretty much Day 1. Fantastic company. A ten bagger in the making. Margins are that high in publishing. They own the real estate they own the content and they literally create customers for businesses out of thin air. For that they are handsomely rewarded with life time revenue sharing agreements. Your comments are so out of order Paul that I've lost all respect for you.

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Steve Hill 25th Jan '17 24 of 44

In reply to post #168562

XLM in response to Tom stone I didn't mention EPS.

H2 2015 Revenue $52.4M

H2 2016 Revenue $51.8M

Coming from a revenue rise of 39% in H1 I was very surprised the slow down was not mentioned in the RNS.

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 Are LON:XLM's fundamentals sound as an investment? Find out More »

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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