Small Cap Value Report (Thu 12 August 2021) - PURP, STCK, VTC, EMR

12th Aug '21 by Paul Scott

61 comments 8812 reads

Morning all, it's just Paul here, with the SCVR for Thursday.

Today's report is now finished.

Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to cover trading updates & results of the day and offer our opinions on them as possible candidates for further research if they interest you. Our opinions will sometimes turn out to be right, and sometimes wrong, because it's anybody's guess what direction market sentiment will take & nobody can predict the future with certainty.

We stick to companies that have issued news on the day, with market caps up to about £700m. We avoid the smallest, and most speculative companies, and also avoid a few specialist sectors (e.g. natural resources, pharma/biotech).

A key assumption is that readers DYOR (do your own research) - don't blame us if you buy something that doesn't work out. Reader comments are welcomed - please be civil, rational, and include the company name/ticker, otherwise people won't necessarily know what company you are referring to.

Agenda -

Paul's Section:

Purplebricks (LON:PURP) (I hold) - recent changes to business model look interesting - new pricing, money back guarantee (with conditions) and agents moving to employed rather than self-employed status. £74m cash pile (and no debt), for a £202m market cap, looks an interesting albeit speculative situation.

Stock Spirits (LON:STCK) - agreed cash takeover bid at 377p, a 41% premium. Congratulations to holders!

Vitec (LON:VTC) - interim results show a strong recovery, getting close to pre-pandemic trading. Not the best balance sheet I've ever seen, but that probably doesn't matter because the group is trading well. Valuation seems reasonable. Looks an interesting company, operating in growing markets, worth a closer look maybe?

Empresaria (LON:EMR) - very impressive interim results, driven by restructuring rather than revenue growth. I'm not keen on the balance sheet, but this share does look cheap, compared with the much larger re-rating enjoyed by Gattaca (LON:GATC) so I'm tempted to have a little punt on EMR.

Purplebricks (LON:PURP)

(I hold)

65p - mkt cap £202m

Change to Operating Model

The business model of PURP is changing for the better I think, addressing significant concerns. Already announced recently was this -

New pricing structure, including money back guarantee - previously…

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abtan

12th Aug '21

Purplebricks (LON:PURP) (I hold)

Hi Investor AD

I think you're confusing valuation of Home Day with their revenue generation since inception.

There aren't many published numbers for HomeDay (and sadly even less since Axel Springer delisted a few years ago), but the last I read:

Home Day revenues from inception in c 2015 to FY19 were €3b, with €2b coming in 2019.
Purplebricks (LON:PURP) owned c14% of Home Day. This was diluted recently by the company not participating in a funding round led by Axel Springer, but Purplebricks (LON:PURP) do have the option to take their stake back up to 14%. I'm not sure what their current stake is.
According to this website Homeday JV generated a profit of €604,212 in 2019.
That's a very specific number!
To be honest, given the stage of growth I'd be surprised if this was accurate - I would expect negative profit at this stage.
The German property sales market is going through a material change right now, probably to the detriment of Home Day, who were cheaper than everyone else, but are being forced to lower their prices further.

I actually think HomeDay will be worth a lot in the future. There are 2 leading hybrid agencies in Germany right now and they are one of them.

It's certainly worth something to Purplebricks but perhaps not as much as €300m.

Cheers

Paul Scott

Hi davidjhill,

Yes I agree with you there. It doesn't make sense to just assume PURP would pay in salaries the same as it pays in profit share to contractors.

Employed estate agents are typically on low basic salaries, then bonuses for hitting sales targets, I believe. So employee costs flex up & down.

Plus there would presumably be productivity gains from employing people directly, because they're not working part-time, or semi-committed to PURP, once they're on the payroll, they would be required to work full time hours, meet targets, or be let go, I imagine.

The company has specifically told us that it's £1m p.a. additional costs from the change to employment status, so that's the figure I'll go with.

Regards, Paul.

Boon

I concur, I spent quite some time trying to work out Homeday valuation, and they have been good at keeping the financials quite secret. Definitely not 3bn.

The only other thing I would say is that if you dig into the JV agreement, there are some complicated agreements between Axel and Purple Bricks, for Axel to acquire PURP shares using a set formula, until 2023. The fact that Axel haven't triggered any of those (that have been announced) means the valuation hasn't vastly exceeded expectations (as set in those formulas). Axel has also made convertible loans to the JV, and we don't know the terms for that - for all we know PURP diluted equity share could be 1% if those loans are converted to equity in the future.

There is a protection from Axel screwing over PURP, in that Axel have a large shareholding in PURP.

For me Purplebricks (LON:PURP) is a " set snooze button and come back in six months to see progress". Current valuation expects a high top line growth rate. However, the number of new properties coming onto market is very slow at the moment and no signs of increasing. The re-org will mean franchisee churn, so in some areas they won't be able to take on new properties because they won't have agents until they recruit new ones. And then on top of that trying to roll-out a new charging structure.

Too many moving parts IMO unless their c-suite are gods and work flat out 24 hours a day. Fully expect one of those juggling balls to fall to the floor.

andywillz94

Big congratulations to everyone holding Stock Spirits!

I sold this one a while ago having bought at the bottom of the Covid panic. This is actually a really nice premium from a company I wasn't even expecting to get a takeover bid. I vaguely remember they had a Tax case on appeal in the courts - did this get resolved / did it not impact them as much as expected?

Again, very well done to everyone who stuck with it!

Tinner1

Thanks, that is a list I need to get onto.

On the pros, ESG has enormous growth potential.

But looking at the £MJH screen, it's a sea of red figures. So we have a loss maker here. Not a good start!

It listed recently and has quickly issued more shares, so a small dilution of 10% already, plus EPS and net income trend down. It will need a fillip to interest me. I could not find the Cenkos broker note.

But not positive at an opening glance.

Andy Sav

Electra Private Equity (LON:ELTA) nice to see Fridays has a sideline of frozen food being sold in Iceland, extending the brand further

Investor_AD

Hi abtan , Thanks for the correction and you are right (as always) . It is 3bn brokered real estate (https://www.eu-startups.com/20...).

sharw

Regarding RNS lists I find this more reliable than Stocko or Investegate. It has various filters you can apply and if you don't want to keep turning the page you can set the default 20 items to a higher number:

https://www.londonstockexchange.com/news?tab=news-explorer

Paul says "That’s not a very clear company description. I wish companies would just describe what they do in simple, readily understandable (by anyone) terms. Oh, and not use abbreviations that anyone outside their sector may not know".

I seem to remember that it was Peter Lynch in "One Up on Wall Street" who said that you should not buy shares in a company unless you understand what it does.

Paul's comment followed from Vitec (LON:VTC) describing itself as "... the international provider of premium branded hardware products and software solutions to the growing content creation market". Oh please, it sells camera stands, prompters, monitors and various other accessories used on TV and film sets.

Then Mr. C mentioned Silver Bullet Data Services (LON:SBDS) this morning. I looked it up since I had not heard of it before (turned out to be an IPO at the end of June). It describes itself as "a provider of digital transformation services and products which assist brand owners and advertisers to optimise their digital marketing investment, with a particular focus on unlocking the potential of first party data and contextual intelligence". I give up.

gus 1065

Interested to read Paul‘s comments on Empresaria (LON:EMR) and its share price relative to Gattaca (LON:GATC) . For reasons lost in the mists of time, I have holdings in both companies which I purchased at roughly the same time about 5 years ago (when Gattaca (LON:GATC) were still called Matchtec). I suspect I bought them both thinking there was about to be some consolidation in the sector (sounds familiar?).

Checking the relative prices I purchased Gattaca (LON:GATC) at 487p (current price 246p) and Empresaria (LON:EMR) at 94p (current price after today‘s rise 93p). (Both companies still have roughly the same number of shares they had five years ago in issue). By my anchored reckoning it looks as though it is Gattaca (LON:GATC) not Empresaria (LON:EMR) that still has the catching up to do.

Gus.

Hi,

I had a quick look at the Checkit (LON:CKT) trading update, but the numbers are still very small, and it looks to be heavily loss-making still, so I decided against doing a write-up on it, as I don't know how to value loss-making companies, it's all guesswork based on trying to anticipate future growth.

On the plus side, it seems to have plenty of cash in the bank.

Rambo

Thanks for that pointer Fred, I scan read the report by "alignresearch" (33 pages long so a fair bit to take in). The report makes interesting reading with lots of interconnected threads throughout so I found it tough going. Your paragraph above probably sums the business/strategy up in a few lines. My main concern would be when you look at the numbers in stocko it does not paint as rosy a picture as the report did but then again this is fairly common with these micro caps. It is difficult for me to see how they are going to generate the cash to grow the storage/renewable project in the UK sufficiently to start investing in the mining end of things without having more fund raisings. Having said this an interesting share and probably worth watching at this stage for me.

Regards - Stephen

rmillaree

Us Ticker TTCF -Tattooed Chef

Forget the Chicken Strips

we need some Tattooed Chef stuff to show up in Iceland at some stage soon - results out tonight from TTCF and im hoping its gonna be at a minimum decent update - they seem to be smashing it at present with all the tie ups they have been announcing and thats without mentioning Tortilla Chips !! - Roll on the Chef

Ok OT ramp over and out - hmmmm must have been watching too many you tube vidoes me.

dahhad

Hi Paul

Just switched from Gattaca into Empressaria so fingers crossed! Would ypou have a chance to look at Atalaya Mining who reported earlier this week for the half year and their presentation sounded promising, though obviously the copper price is key!

Thanks

Annesley

ridavies

Hello Gus 1065 and others. Nowhere near so comprehensive as good old LSE and their listing of RNSs. In fact Investegate miss an awful lot in my experience.

Silver Bullet Data Services (LON:SBDS) looks like its just a consultancy company, but one that specialises in marketing data and Customer Data Platforms (eg like the Treasure Data one it mentions in today's announcement).

It doesn't own any technology itself, or IP. Just purely a consulting practice.

All the major consultancies (EY, PwC, Accenture, Capgemini, etc) all also offer MarTech consulting. Albeit their staff might not be as knowledgeable as SBDS?

Always easy to have excellent skills and knowledge in a small consultancy. Its growing and recruiting more at pace that is the tricky bit. Then there's the hard bit of winning contracts at big companies, who are very loyal to the large consultancies. So you get stuck winning smaller contracts = lower margins.

Key is to read in between the lines. Checkit (LON:CKT) gives really nice table breaking down revenues, by segment, also by recurring and non-recurring. Guess what's missing? Any mention of profits, gross margins, etc..... you have to ask yourself why.

They do give something away. Net cash. Down £3m over HY.

My own calcs, based on the revenues they've provided, show that £3m is probably a fair operating loss incurred for the HY.

And at the current gross margins, they'll need to increase half yearly revenues from circa £8m to £18m before breaking even.... but they only have enough cash to survive another 2-3 HYs before running out...

Might be OK if they're showing growth rates of 30-50%, but they are barely anywhere close to that. And no mention of accelerating sales, good sales pipeline or order books either.

£40m valuation looking very punchy. As always, DYOR. I might have gotten my sums wrong, as have only spent 15 mins looking through their numbers!

I think this is brand damaging for TGIs. Very bad idea.

I think this is brand damaging for TGIs. Very bad idea. A restaurant brand needs to be aspirational, not available pre-packed in Iceland of all places! (difficult to get more chavvy)

Small Cap Value Report (Thu 12 August 2021) - PURP, STCK, VTC, EMR

Purplebricks (LON:PURP)

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Paul Scott

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