Small Cap Value Report (Thu 11 July 2019) - SOS, VCP, SOM, MMH | Graham Neary

11th Jul '19 by Graham Neary

50 comments 12410 reads

Good morning!

I added a section on Ten Entertainment (LON:TEG) late last night to yesterday's report. That report now includes Superdry (LON:SDRY), Equals (LON:EQLS), Alpha FX (LON:AFX), and Ten Entertainment (LON:TEG).

For today, we have:

Sosandar (LON:SOS)
Victoria (LON:VCP)
Somero Enterprises Inc (LON:SOM)
Marshall Motor Holdings (LON:MMH)

Sosandar (LON:SOS)

Share price: 14.5p (pre-market)
No. of shares: 163 million (after Placing)
Market cap: £24 million (pro forma)

Placing to raise £7 million

Paul is going to chime in on this, but here are the facts:

Conditional placing at 15p (less than half of the share price at which it raised money last year).
Placing shares will represent 28.7% of enlarged share count. Meaningful dilution for existing holders, therefore.
General Meeting on 29 July to confirm the deal.

Analysis - It's not a huge surprise that Sosandar needs more funds, since cash had reduced to £3.6 million as of March 2019, and it is going to make loss this year while at the same time trying to almost double revenues.

Paul himself put it to management last week that "cash looks set to run out in early 2020", and received a reply he described as "generic".

It must be difficult for management teams in situations where we can see that they need more money, but they need to put on a brave face on things and give nothing away about conversations which might be happening in the background.

While I'm an outsider in this situation, I suspect that it was best to get this Placing away sooner rather than later. It's better to do it before the need for cash becomes desperate. Also, after a disappointing Q1, the direction of least resistance for the share price was downwards. Diluation at 15p might sting, but dilution at 8p after a weak Q2 would be far worse.

The size of the Placing is also quite interesting. £7 million should keep the wolf from…

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mojomogoz

11th Jul '19

Sosandar (LON:SOS) raised £7m at 10% premium to start of day price yesterday.

I made this comment after 3 July FY results:

https://www.stockopedia.com/content/small-cap-value-report-wed-3-july-2019-nar-soli-imo-mlvn-sos-loop-redd-tpt-wrks-purp-488901/?comment=25#25

Obvs I'm wrong on my 'What's going to happen" point 2 as they raised at a premium! And at the moment on point 1 that the stock will trade down to towards market cap equivalent to revenue (5-8p pre raise).

I'm surprised by the appetite for the raise institutionally but I suppose its institutions buying some 'out of the money growth options' if SOS takes off.

I feel slightly bemused that management must have been much more clear and revealing in their disclosures to institutional investors than they were in their results (unless its absolutely devil may care option gambling institutionally).

I am probably learning a lesson about high growth investing...

MrContrarian

My morning smallcap tweet:

Sosandar (LON:SOS), Tekcapital (LON:TEK), Mporium (LON:MPM), Blancco Technology (LON:BLTG), McBride (LON:MCB), Big Sofa Technologies (LON:BST), Indigovision (LON:IND)

Sosandar (SOS) £7m placing at 15p, a 3.4% premium, for working capital and further expenditure on new customer acquisition. Why did they wait until a dramatic slowing in growth to do this? SP was 28p only 3 months ago.
Tekcapital (TEK) £0.75m placing at 8p, a 30% discount, to keep the lights on.
mporium (MPM) gets shot of lossmaking Fast Web Media for £7500. Recent loss was 950k.
Blancco Technology Group (BLTG) guides FY profit ahead of market expectations. £10m placing at 2% discount to fund 2 acqusitions.
McBride (MCB) weak H1 - FY will be marginally weaker than expected, FY broadly in line. Current trading also weaker than expected.
Big Sofa Technologies (BST) H1 rev £1.1m up 70%, "on a materially lower cost base." Is this in line? No guidance.
IndigoVision Group (IND) H1 rev up 8%, op profit "or the first time since 2014 ". In line? F/C FY rev growth 13% so maybe not so good.

Snoo

Sosandar (LON:SOS) - cash was £3.68m at year end.

I do think they are hedging their bets a bit. They have to go for it for the rest of the year in order to meet their expectations. Any type of miss in the next trading update would send the price down further.

To be honest I do think that much of this money will disappear into marketing, which is needed to hit the expectations.

I do think on the forums Hall/Lavington enjoy a real easy ride. Any other industry people would be wondering about their suitability for the corporate world, which requires a few different skills. To me I just don't think they realised that the markets would take 23% growth very poorly and instead focus on the much better 122% repeat customer figure even though that came off a softer comparative.

Personally I think selling on third-party sites is a bit of an own-goal. Something like Ebay cheapens the overall proposition (Superdry use this channel to discount heavily), a tie-up with someone like Next would also be poor in the long-run as they would then get knowledge of what sells well, and then copy it themselves.

RichardK

Graham, i would like your views of Victoria (LON:VCP) F/Y results. Good looking 'underlying' results with lots of adjustments which are too complicated for me, but statutory loss, and no dividend as usual. I am a weak holder.

Richard

rmillaree

mojomogoz
I feel slightly bemused that management must have been much more clear and revealing in their disclosures to institutional investors than they were in their results (unless its absolutely devil may care option gambling institutionally).

Interesting thought - paul certainly added more flesh to the recent trading update that wasn't 1005 clear. But i am not convinced that the management know exactly where this business is going never mind anyone else . I have no reason to believe they have held anything back particularly other other than the lack of explicitly confirming sales where on track for £9 mill plus. To me the doubling of sales story being intact and decent brand potential and repeat orders is more than enough to get the placing away on the basic facts at the current price is it not?

I can easily see a scenario where discussions where had pre results (20p+ shareprice) and indication raise may be in offing and that long term they were roughly on track . Based on these known facts institutions are getting a bargain compared to where price was previously. I am guessing they are used to large share price variations in such entities. Note the large cash injection de risks the business to such a large extent that they and company management would know the instant impact on the share price would be positive and not negative at these depressed levels so i underdstand the somewhat quirky nature of paying ott - its not like they could buy that bulk of shares in the open market.

Note i would be much more inclined to buy shares today rather than yesterday - having said that i still default to the fact that the company hasn't quite proved that they will be at 20 mill sales within 36 months and that is approximately where they need to be. Hopefully they now have a war chest to push on the sales to a much higher level.

Mr contrarian

Why did they wait until a dramatic slowing in growth to do this? SP was 28p only 3 months ago.

Good question - all i can guess is that they had zero inkling shareprice would not be in the high 20's plus today if they were (and they still are per them) on target to hit £9 mill plus sales. Note it did make sense for institutions to wait to see that the maturing business was still on track before stumping up more cash - so perhaps there was also indications that they had to wait and release these results with update for 2020 first?

My thoughts it will be interesting to see how this pans out - if they have war chest available - lets say £1 mill extra this year to plough into discretionary advertising - they should potentially be on track for £10 mill plus sales now? will they go down this route if it increases losses. I would want them to do that within reason as anemic sales growth is probably the one thing that will depress shareprice more than anything - that tends to be how the stockmarket works these days with growth companies. My one worry would be that if they know the funding was arriving and it was this war chest that they were planning on using to make the existing target of 9.3 mill sales. It would be nice for broker note to come out showing that this extra funds will change things - i suspect we will not get anything like that though.

Martin C

I agree with most of what you say. Looks like FY guidance was only marginally reduced (9.5 -> 9.3M) because they were aware they would have a big spending pot for the rest of the year and could "spend their way to increased revenues". Without the placing and the extra marketing spend they would've had to slash forecasts.

Having said all that i do still like the company for the long term. Not a buyer though until i see proof of revenue momentum recovery and next update will be in October - by which time economic/brexit events might have taken over.

Graham Neary

That's a terrific point, MMC071. I also came round to the idea that this is a "stealth downgrade" of sorts, unless we see upgrades to forecasts. The old forecasts were based on the cash balance at the time, not £10 million+ to spend. Cheers.

Richard, happy to look at that despite the large mkt cap. Thanks. G

FREng

Marshall Motor Holdings (LON:MMH) issed an in-line pre-close update this morning. They say the market is tough but they are doing better than competitors (I paraphrase).

Somero Enterprises Inc (LON:SOM) has also issued a trading update, copied in full below:

Somero is pleased to provide an update on trading ahead of its interim results announcement scheduled to be released on Wednesday 4 September 2019.

The Company confirms that its trading performance to date and expectations for 2019 are in line with the guidance provided in its 7 June 2019 trading update. Accordingly, the Company expectation to deliver 2019 revenues of approximately US $87m, EBITDA of approximately US $28m, and expects to have net cash at 31 December 2019 of approximately US $18m remains unchanged.

rmillaree

On Sosandar (LON:SOS) I reckon the most bullish thing that could happen with the £7m is that they splash out on a relevantly experienced CEO and perhaps CFO too. The co-CEOs should focus on product as they don't convince they are comfortable at CEO. The current board is partially inherited from reverse takeover listing and is perhaps rather hands-off devil may care?

Perhaps some of the above explains a rather haphazard financing and marketing strategy. Also, its clear that they underperformed in the last two quarters in terms of product. As an early stage growth company this is the key issue. I would love to know why the funding institutions believe a corner has been turned on product and marketing that means they will pay a multiple of sales for a loss making low track record company.

I actually think Sosandar will work but the steps so far do not deserve the current premium and hint that more capital or even a bigger parent may be needed to transition the business to profitability. My hunch (and I am not a good or experienced high growth investor) is that a better buying time will arrive - either lower price or at point where valuation is more relatable and downside managed.

If I were still a holder I think I would sell today. I'm surprised that investors are keen to buy when the evidence to date is poor from a corporate and financial management perspective even if there have been moments of success with product and profile.

I'm probably going to be proved wrong and the situation is interesting for that reason. I have no position at the moment but I have more ease imagining a trading short position than a strategic long.

Small Cap Value Report (Thu 11 July 2019) - SOS, VCP, SOM, MMH

Sosandar (LON:SOS)

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Graham Neary

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