Small Cap Value Report (Thu 19 Nov 2020) - SAGA, VLX, SOM, HEAD, ACSO

19th Nov '20 by Paul Scott

118 comments 14275 reads

Good morning, it's Paul here with the SCVR for Thursday.

Timing - update at 13:11 - mostly done for today, I'm taking a break for lunch now, so hope to be back later this afternoon to finish off. Today's report is now finished.

Agenda - I can't cover everything, but these news items have caught my eye;

Somero Enterprises Inc (LON:SOM) - Trading statement (done)

Headlam (LON:HEAD) - Trading update (done)

Accesso Technology (LON:ACSO) - Full year trading update (done)

Apologies for abandoning my post yesterday afternoon, I've still got 2 companies to finish off. Friday is a good catch-up day, so I'm planning on getting up-to-date fully tomorrow.

What knocked me off track yesterday, was my portfolio started going haywire (in a good way!) with two of my top three holdings going up significantly. I'm primarily an investor, and a writer second, so when something big is going on, my apologies, but my personal portfolio has to take priority in the short term.

Saga (LON:SAGA) (I hold) - this was yesterday's biggest market riser, up 34%. What fuelled this? The only company news was that the second largest shareholder had slightly reduced their position, if anything slightly bearish. Yet it rose substantially, on another high volume day. I was searching for reasons for this (apart from it being very cheap, in my view), and the most likely reasons seem to be;

Positive vaccine news, in particular Pfizer saying its covid vaccine seems to be 94% effective in the over-65s. Saga of course provides insurance and holidays for the over-50s. Therefore the market seems to have twigged the rather obvious point that, with the elderly being vaccinated first, and having a penchant for cruising, then this should be good news for Saga's 2 brand new cruise ships possibly being able to generate lots of cash (they're heavily pre-booked already), perhaps from (at a guess), April or May 2021? That would transform Saga's profits and cashflow for the better.
I see broker forecasts seem to have been updated, and Stockopedia is now showing a forward PER of 9.3 - based on forecast EPS of 37p in FY 01/2022. I'm working on the basis that the potential for the year after is a good bit more than that - just getting back to historic profitability, it achieved c.180p EPS…

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mojomogoz

19th Nov '20

To round out £IMMO ...

Astounding success to get their £1.2m raise away at premium. Bravo! Well played the dark arts ;)

Here are more thoughts partly as I have written more positively about IMMO in the past here. I might be wrong so ignore me (but hopefully I have given people a bit more insight). And if someone thinks I'm right then maybe they get a chance to exit at decent price.

I first bought this at 7p at beginning of year (when I think David did too as I recall). My view then was its operating momentum was under appreciated. I got good face to face with CEO and CFO too (before meetings were banned). Good mgt team for a startup biz. CEO is clearly a proper entrepreneur...bashes down barriers...and I wouldn't trust him as far as I could throw him (which is a complement for entrepreneur!...but something to be a bit wary of for a listed company that you have a stake in if the listing/price is in the way of ambition).

It was a small position for me as it was at the speculative fringe of risk-reward I want to consider.

I then bought quite a bit more at c.2p during the covid fall...still a small speculative position as I was assuming a chance of catastrophe and large loss. It's a business that could just fail.

I sold out at average c.3.65p and booked a small loss (c.-7%). If only I'd waited I could have had a small gain! Its a trade by appointment stock and the appointments were tricky...and they will be again. (With near 2m shares I had enough to make selling sticky)

Thinking:

The probability of touching 5p over the next 4 months over say 2.5p is c. 1:10 or worse. Depending on newsflow and funding position I might be a buyer at low price as I like the mgt and the location based product. I might get lucky and see information that indicates that they can get through things as a public company but wearing that pain might hurt the price which is assuming miracles today (IMO obvs).

Why might I be wrong?

I'm not wrong if its about organic growth of 2 to 8 seater installations. For sure IMMO needs to take the set up costs of that through its balance sheet ahead of any earnings. Debt finance for a company in IMMO's position will be modest and expensive...so equity is the route. They'd need more equity to do anything other than a crawl of new openings. Not ideal.

Lets Explore home VR ain't the solution either. That may turn into a significant business with time but they are so early in that trajectory with a lot of product development and positioning to make it happen. Their RNS today talked about dino and space addition to underwater in mid 2021 and early 2022. To get real commitment to this package they need to show they have a series of exciting experiences...and they are not in the position to make that happen quick. I bought it for nephew and niece (5yo and 8 yo). They loved it...but they also had experienced it pretty quick. £69 theatre ticket is pricey....it needs to be a season pass. How are they going to monetise dino and space? They can't ask for £69 now and then £30 each for dino and space downloads....what figure do you think? £5? £10?

And they need more than dino and space. They need half dozen. So there's serious investment needed. £700k of revenue before Xmas is just a splash for capital hungry £15m market cap biz. Nice but not game changer. And if you believe the raise RNS then they are telling you it costs money to have the product and they need most of £1m to get started making it real....could they be naughty and just shut it down after Xmas?....or sell it on to a biz with the pocket and capability to develop and they provide some fee based support? Very naughty!...and also a brilliant entrepreneur type move (that world is a sharp one that makes The Apprentice and its wannabe sharks look like Sunday school). £1m funds another Mandalay Bay...that would be a great use of the raise but they didn't want to say that (and maybe they ain't doing that!) but why not tell the market?...well the market doesn't want to hear you need that money to go fishing. They want to hear its in the bag...and even then they would be a bit disappointed as its not financed from operational cash flow.

IMO this comes down to being able to repeat Mandalay Bay type large theatre elsewhere and to do it with very little upfront capital. How? Partner destination are usually quite capital constrained so they are not likely to cough up £0.5-1m upfront...they're looking for IMMO to do that (and it's what IMMO attractively sell...no cost revenue as they take all the upfront and then split the take from punter throughput).

The Answer as to why I might be wrong = Asset level finance for major attraction. I'm not an expert in this sort of finance (luckily IMMO's CFO is relatively speaking I believe having worked in it for Nomura or similar firm). Pre covid this was a potential route. Some problems I guess at are the asset will be worth much less than the finance (the costs of hardware is really low...which is good if operating momentum is achieved...but doesn't form collateral value). So its really secured on the cash flow expectation. That means that IMMO need a 'payment guarantee' from their partner site. This is hard as it means the partner is taking some risk on the installation or at least is required to commit to serious marketing for IMMO installation. The financiers will look for strong commitment. This is all possible but its got high hurdle and it got higher due to covid. A german zoo ain't going to want to risk its cash-flow in anyway...the attraction of IMMO is its free-lunch value to these generally capital constrained businesses.

I suspect asset level finance is a harder route post covid for variety of reasons but particularly uncertainty on whether or how quickly attractions get back to normal and what people want to do/see at them.

My guess is that Lets Explore doesn't go far in terms of value for shareholders and that available resources will be targeted at another big installation that they will aim to have in play by late Spring for the lucrative summer months. Plus any other spare cash will go into paying for a few more smaller installations and to show a bit of growth momentum their.

I wish IMMO well. I like the product and the management did a fantastic job before getting nobbled by covid...it was so unlucky. They might have needed another financing round anyway but they would have done it with operational momentum at their back. Now they've got to create momentum from standstill....and the hiatus has burned up their valuable cash.

I will watch. The share price will likely move a lot for not much reason.

Through a process of deduction I see a take private as quite possible. For sure not what mgt intended to happen...but their job is to have the business live and get a return for themselves

Threepeat

Yes Whit, I agree. Most of my investor friends took a look at £avap debt and got scared off. However being first out of the traps talking to lessees and bondholders has lessened risk all round. At 100p I would have added but its a big enough position without any more.

Talking of aviation stocks I still think £wizz will be the winner in the UK and European air space (haha) with its strong balance sheet. However the SP ar 4500p may have not ahead of itself given the current CV situation. I'll be surprised if it doesn't snap up more slots. Unsurprisingly I hold. Another big position for me

FREng

I have found that when there is no online quote available for "at best", A J Bell trade limit bids rapidly if there is a market available for the price and size I want. From years of experience of fills well within the limits I have given, I trust them to get the best available price.

@IGotPoesJacket

I'm sorry but I have finally given it to daily curiosity. What's the story behind Poes Jacket?

LadyInvestor

GTrader

#qinetiq

1James1n1

Paul, I found the following email address via the payment confirmation receipt I received from scsw. Thanks for alerting them to the issue.

subscriptions@scsw.co.uk

Naked Wines (LON:WINE)

Good business, wrong price. I looked at it when it was in the 200-250p range. I felt it was a bit over priced then. Clearly covid was a boon but I'm sceptical of how mgt have presented the great result during covid as a step change with durable higher profit growth from there.

Even with a great 'one off' covid hit and using it as a new base they say their 'standstill EBIT' is £26m. So lets call that £20m PAT meaning 18x....clearly a bargain if growth continues to shoot up from here....but if growth back fills and struggles as they digest the covid leap then it could look very ropey (and it creates uncertainty in where KPIs are actually at but they've got to spend money as if they are much bigger sustained business)

I listened to the call today and asked a Q re 'wastage' and picking errors etc. The CFO said their pick error is 0.2% in the UK....impressive...however, as a customer I've experience a rate many many multiples of that! My experience is that their systems and processes can struggle....I was quite entertained that they talked about needing to grow their fixed costs with customer cost...I thought they were fixed!...maybe everything is more labour intensive than it should be?....is that cash on balance sheet going into a big warehouse project?

I was also surprised that their payables went up so much during covid. It was my understanding that they forward pay for the wine...that's why they get winemakers as they make the financing easier for the independent

samanddee

This is an interesting stock maybe the stars all suddenly aligning for a return to previous highs. Still a fifth of its value only a few years ago. Cruise ships were the first hits in the pandemic but maybe there will be pent up demand to get going again. Whilst I’m far from wild on the greener aspects of cruises this share certainly has a good play I think for the next couple of years. Interested though what makes it your largest holding if i may.. I dipped my toes into it on Monday pm so happy so far...

Boon

Funny how for growth companies and digital companies, we're willing to look at "EBIT" excluding marketing costs, like here for Naked Wines (LON:WINE) that you're proposing.

Yet for all other B2C companies, this is never done.

Is marketing that "special" to be treated differently for digital and growth companies? Or just a flimsy excuse to come up with a profit number that looks good compared to the market cap?

Logical David

It looks like people can even donate their old car for free to Zane via the Giveacar scheme. The charity can then raise money through scraping it, or depending on the cars condition they can send it to auction and raise even more money.

Not liking the Naked Wines (LON:WINE) half year report to be honest, at a first glance. Looks like a lot of adjustments, re-definitions of what should be core metrics, etc.

My red flags when reading reports are when there's loads of superscripts, lots of unique management-created KPIs (e.g. repeat customer contribution, 20 year Customer Lifetime Value, etc).

This is all financial engineering IMO.

Why does Naked Wines feel the need to create a new profit KPI, called "Contribution"? That sits between gross profit and EBIT? While at the same time creating another, called "Standstill EBIT"?

And even "Marketing spend" is further engineered. There is "Marketing - R&D spend", which is defined as marketing spend for the purposes of "researching and testing new marketing channels and creative approaches".

What next? Will they try to classify some of the Shipping costs as "Shipping - R&D spend" as defined as where they're using a "new" shipping partner for a portion of deliveries, so its classified as "experimenting and testing", and therefore shouldn't be in operating costs!

-----------

If you're happy to accept all these unique KPIs instead of the industry standard financial KPIs, then good luck. For me this stinks of management trying to misdirect investors on the true financial performance of Naked Wines, and hoping that after a few years of "growth" it will all come together when they do need to report on standard financial metrics.

smilingmickey

Hello Paul,

First may I thank you for the excellent coverage of recent Saga News which has resulted in me including them as a holding in my recently formed personal mini portfolio of UK smallcap Companies, which I believe may now be undervalued by the market. I would recommend to anyone who has time, to view the 2 hour online presentation of the recent results, in order to understand why the Company had fallen on such bad times and how it is now being invigorated. One good thing I have gleaned (I hope) is that the performance of the insurance business together with the the recent financial transactions mean that the debt costs can be absorbed until the cruise ships start operating again, whenever that happens to be.

Somero Enterprises announcement today that profit would exceed expectations for the full year was also well received. Not a surprise in reality. They have no major competition and there was a backlog of outstanding work once construction started again. During the last couple of years the share price had drifted down (at 1 stage to 150p!) but has started to recover. The revised cash forecast for the year end suggests to me that the significant dividend payments of the last few years are likely to continue.

FWIW if you complete a Ben form through your broker it is valid for a period of 3 years. It is quite simple to complete and in most cases provides relief from dividend taxation (depending upon how you hold them and with which broker) on any US held stock during the period. The divi % levels are very attractive when holding Somero in ii or Redmayne Bentley ISAs, even after some (limited) tax deduction by the US.

The Company is valued as a construction stock but the reality can be seen if you look at the margins, ROCE/ROE figures etc on the stock reports which are have been consistently high for many years. They have built a formidable moat!

Westway001

I agree with you. To suggest that the increased sales boost provided by lock down will be repeated year on year is fantasy land.

Gromley

Funny how for growth companies and digital companies, we're willing to look at "EBIT" excluding marketing costs, like here for Naked Wines (LON:WINE) that you're proposing.

Yet for all other B2C companies, this is never done.

Is marketing that "special" to be treated differently for digital and growth companies? Or just a flimsy excuse to come up with a profit number that looks good compared to the market cap?

I have not looked at the numbers for Naked Wines (LON:WINE) but it is a point worth considering about what the marketing spend is for.

About a year ago (I think) Innovaderma (LON:IDP) came under fire for capitalising customer acquisition costs.

But if you have to spend say £100 on marketing per customer that sign's up and you can then contact them directly without further spend and on average they then spend £500 / year over the next five years (all made up numbers) then it may be defensible.

It seems the accounting rules may make the issue seem different for Naked Wines (LON:WINE) (there are a few hoops to leap through to capitalise customer acquisition) but it is essentially the same argument.

I wrote a piece a few days ago on Balance sheets and this picks up on one of the implicit themes

Not all productive assets are "Tangible" and some of them may not even be recognised on the balance sheet at all.

Whether this applies directly to Naked Wines (LON:WINE) or not, I cannot say without looking, but it is not automatic that this method of valuation is wrong imho.

Michael Tee

Hi David / Mojomogoz,

So I have been trying to understand this situation. Your concerns seem to centre around Capital /cashflow and the rest of this difficult C19 period. Without C19 all looked rosy once the Mandalay Bay installation was complete as IMMO receives $9 for every entrant. Mandalay Bay is still open. Capacity is reduced from 2000 but still 1050 which is a lot of $9 for Immotion. Some partner sites are shut and some with reduced footfall. Nonetheless IMMO made a profit in October, loss in Nov, probably profit in Dec. Jan is no doubt normally a poor month.

Cash equals £1million before today + £1.2million placing + £400,000 LEO sales = £2.6million capital.

The 7000 LEO units are already paid for and they have 100 headsets also paid for.

How much money do you think they need?

What has changed so much from before Covid?

I do not think the Capital structure has changed?

Michael

With the vaccines now arriving, presumably we might expect C19 to be less of an issue by March and it would seem there is enough cash to cover this period.

Antehelion

re £WINE I just don't see the business model of booze-by-mail working in a world where every supermarket is battling on price to supply a similar product alongside the regular weekly groceries shop - they also have far better buying power and robust supply chains.

We don't have dedicated "tins of beans" by mail companies - I just don't see the edge or rationale here - we've not generally seen supermarket stock issues on booze items throughout the pandemic so I just can't believe that they would have taken any significant lasting market share vs supermarkets - maybe a short lived boost from those who couldn't get a supermarket delivery slot and didn't want to / couldn't go to the shop perhaps.

Not a holder or shorter, I just wonder "if the company didn't already exist, would you bother to make it"...

Zipmanpeter

20th Nov '20

re £WINE "We don't have dedicated "tins of beans" by mail companies" so why "booze-by-mail" when you can pick on weekly Supermarket shop.....

Actually, I am sitting looking at the 4 x 2.5kg cans of chickpeas/beans my wife bought (by error - we normally buy them dry and cook ourselves but hey-ho!)......

The reason why I think wine may be a good subscription product is that it is relatively high value product, has a long tail of smaller producers with (arguably) differentiated products that need to find a way to market and a physical SM could not hold and crucially is a product with a high level of consumer engagement. If you are a wine buff, you actually get pleasure from reading about small vinyards and perhaps day dreaming over a few glasses that you could be picking grapes in Provence or South Island and, at risk of stereotyping , may have already given up weekly shopping for timed online deliveries or convenience shopping.

How big is that niche, I am not sure but there is a very good business to be had meeting the demand well. For me the price is now too high but I can see the appeal.

There's a high chance I'm wrong on Immotion (LON:IMMO) ....but I've laid out my views in detail and not just a retelling of the company narrative (maybe a bit messy -> sorry). So if people have better insight and info you can easily dismiss me. I have done this as I talked positively about the stock before (although flagged its high risk) in this forum.

I like the CEO and I think he will make the VR attraction product work. The VR attraction product is a great bit of entrepreneurial development and adaptation that I believe the market underpriced pre covid (from a high risk growth perspective, ie assuming outside capital would be available to meet needs). I simply think that the capital vehicle and/or share price is under pressure now. News and events may persuade me otherwise. Mgt will really duck and dive to make their baby work...I feel confident they will arrive at a positive end point. I'm not confident enough I would enjoy that from a shareholder perspective....fate has dealt them a tricky situation at exactly the wrong time. Its hard to be unluckier! Existing shareholder have and will wear the cost of bad luck.

By implication £1m cash in biz includes sales of LEO up to 15 November. Cash on hand at 25 Sept reported as £1.2m. So in 7 weeks they have used £200k despite 'trading strongly' and have the boost from LEO (c.£215k revenue). You imply that LEO is all money to the bottom line and if this is true then their non LEO cash burn has been >£415k. I suspect there are LEO related costs too and not all the cash drops through (sales, targeted facebook ads can be expensive for some category, operational support costs, etc). They don't clarify what October trading was like but by implication it looks like it tailed off. Why? Some seasonality and some covid acceleration in US? Given that they have the October numbers in the can and they will have good Nov to date insight I find it a bit suspicious they didn't update on them -> it seems rational to assume they are weak.

I've been wrong about covid. Simply, I have never denied its problematic but I did believe we would more to managing and coping....whereas we are still in the position that data tail (sometimes questionable) is wagging societal dog all over the place. IMMO are in a potentially financially and operationally sticky patch as they may face more US restrictions with Biden.

Their minimal costs are more than £215k per month as this excludes capitalised development costs and IFRS16 charges. Who knows what 'EBITDA' monthly loss is but based on Q3 numbers assuming a round £100k loss per month seems sensible...and remember EBITDA is depreciation and amortisation added back...think about that in an IMMO situation where the have halted capital spending and development as much as possible, yet they are adding back old D&A to get EBITDA. Pre covid they looked like they were on approx £4m pa in equipment and development costs and that gets written off over 3 years straight line. This is helping to explain why although minimal costs are £215k per month and EBITDA loss is low they are still burning cash....

Now to get rolling again and grow they need to invest....so cash burn goes up more....hopefully revenue does too but to some extent business already acquired may have some damage (eg Mandalay Bay has cut capacity....and PS they keep half of $9 not all of it). IMMO is priced like its going to grow....£16m market cap, perhaps £4m revenue (could go up a little with good normalisation off current base) and likely minimal if any real profits yet. How long can you wait for jam tomorrow in current environment?

Here's comparison of operating momentum reported for Jan 2020 raise first and then the current raise:

The above isn't pretty. It does show both the potential from reopening but also how far back the business is from early in year. But the market cap today is c.£16m relative to Jan 2020 around £22m. About 25% discount...is that enough?

Obvs DYOR. I don't know the future and I may be parsing and discounting available information wrongly but from what I can figure out I'm amazed at 4p raise...truly a magic trick.

Enough on IMMO now. I'll watch with interest. I like it...and maybe there will be an opportunity I can understand in future...if I'm lucky lower price but might be higher

Small Cap Value Report (Thu 19 Nov 2020) - SAGA, VLX, SOM, HEAD, ACSO

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