Small Cap Value Report (Thu 27 Dec 2018) - EPO, SDRY, SOS, PLUS, BGO

27th Dec '18 by Paul Scott

22 comments 8905 reads

Good morning, it's Paul here!

I trust that everyone's Christmas break was enjoyable. The press reported that about a third of the UK population intended heading into town & city centres for the Boxing Day Sales. It will be fascinating to see the forthcoming trading updates from retailers, to see which ones did better than others.

I note that Superdry (LON:SDRY) shares have bounced strongly from the recent profit warning. It's beginning to look as if there might be some oversold retailers shares. Although as always, bottom fishing is so dangerous. I'm waiting to see what the trading updates are like, before making any purchases. As some readers have commented though, why get involved in a difficult sector at all? A very good point. Although a bombed out sector often contains some excellent bargains, if you rummage carefully through the things to avoid.

For me, online retailers are the main things of interest. So Boohoo (LON:BOO) and Sosandar (LON:SOS) (SOS is my largest long position) are my top sector picks, along with Next (LON:NXT) - which has a highly successful online operation, and is managing down its retail estate very well.

By my calculations, the recently revised-upwards forecasts for Sosandar still look very undemanding - there's hardly any uplift impled from H1 to H2. In reality, the uplift from H1 to H2 should be very substantial - not only from rapid organic growth, but also from seasonality (Q3 should be a huge seasonal spike for Sosandar, as it includes the busiest months of the year - Oct & Nov). Therefore, I feel that the recent Sosandar sell-off, triggered by imagined (but almost certainly wrong) read-across from the profit warning from ASOS (LON:ASC) , is a buying opportunity. We shall see. Looking at the previous trading updates, it looks as if the schedule should be a Q3 update on or around 10 Jan 2019.

Marks and Spencer (LON:MKS) has turnaround potential, in my view. What is often forgotten is that people get older. Hence, while young people may not be interested in M&S, they probably will do so, once they're 50+ and have more disposable income. The…

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psin

27th Dec '18

Be very interested in the outcome of your IDEAGEN meet - was it last Friday? Must have been a good one...........

Sk8dad

After Brexit & Trump, nothing seems to divide us more than Plus500 (LON:PLUS). I am in the supportive camp, and feel they should not continue to be doubted - not least because they have been paying these tremendous profits as dividends year in year out - what better way to end debate on whether these profits are genuine. Yes, there is a withholding tax applied (around 25% of dividend, some of which can be reclaimed) but still this fares exceptionally well. I don’t think it’s sufficient to say ‘it ticks all the boxes, so it must be too good to be true’.

ttjs4

I've learnt to avoid companies that are heavily shorted, Plus500 (LON:PLUS) is the 4th most heavily shorted stock (as a % of shares outstanding) on the LSE that's tracked by shorttracker:

https://shorttracker.co.uk/companies/?sort=2&d=desc

I don't know the business well enough to understand why it's shorted so much at such a low P/E, I will happily sit back and enjoy the fireworks.

Passmore

Can anyone shed some light on where Sosandar (LON:SOS) does most of its advertising/promoting to potential customers? Just having a quick look on the social media platforms (Instagram 22.1k followers, Twitter 761 followers, Facebook 58k likes), their following seems very low for an online only brand compared to the more established etailers/retailers, and to the many lesser known non listed online only brands, mainly promoting on instagram.

Interested to know how they’re reaching their target demographic?

Not a holder, yet.

Boon

With Plus500 (LON:PLUS), the big risk is of course regulation.

At the intersection of gambling and financial services, there's just too much risk that governments will make decisions that will impact profitability.

Just look at what the government has done to gambling shares (Playtech (LON:PTEC), William Hill (LON:WMH), etc).

Mark Carter

Marks and Spencer (LON:MKS) "in my view. What is often forgotten is that people get older. Hence, while young people may not be interested in M&S, they probably will do so, once they're 50+ and have more disposable income"

Oh dear. You know you're getting old when Marks & Sparks seems like a good place to shop. Actually, M&S isn't all that expensive, really. Pair of trousers online coast me about 15 quid, excluding delivery. They seem to have been that price for decades.

It's is not great quality, it's not lousy quality. You MAY be able to get something cheaper elsewhere, but chances are that it'll be rather substandard quality. I won't shop in Primark again, for example, because their goods are just too shoddy.

I am now officially old, BTW, both in body AND in spirit. Now get off my lawn!

abtan

I've no doubt that Plus500 (LON:PLUS) profits and cash flow are real, however, I will never buy them (again) for the simple reason that many of their announcements purposely mask the true underlying picture.

For example, in Q1 of this year they were very excited to announce record sign-ups (72,960)...
...but failed to mention that they also had record high customer churn (78,637) - so in fact finished the quarter with fewer customers.

For context their previous highest churn quarter was in Q3 2017 (28,408).

ARPU (Average Revenue Per User) has also fallen significantly, whilst AUAC (Average User Acquisition Cost) has increased dramatically - not good for the company at all!

Worth also mentioning that Plus500 (LON:PLUS) have recently consistently been making reference to "market expectations."

Net Profit market expectations for this year are $340m (according to Stocko).
Given that Net profit for Q1-Q3 was already $311m, then exceeding market expectation hardly seems taxing. I would have had more faith in how they were doing if they actually gave some figures in their recent updates.

Given how much of a positive picture they continue to paint in their announcements, I'll always be suspicious and will happily stay out.

And that's without even mentioning the mass director sales this year or any future regulatory impact.

GLAH

Paul Scott

NB. Re £PLUS I am not questioning that the profits & cashflow are real. They are real, and the big divis confirm that.

What I said is that the valuation suggests that the market believes that they are not sustainable.

Big difference!

PP.

Rusty2

Well I'm old now, haha and I rarely shop in M&S any longer, usually because I can get clothes elsewhere much cheaper. I did look in the M&S sale for some trousers but very little choice in my size so did not buy anything. There is a lot more competition now, I did buy a load of clothes from Mountain Warehouse in their sale, some was ridiculously cheap, such as shirts reduced from £30 to £2 then I got 10% off as well. Coats from £200 to £63 and £110 to £28. SportsDirect also are doing loads of sales, some are quite decent about 80% off for brand names. Just because people get older does not mean they will go to M&S. There is also supermarkets such as Asda. I did buy some pants in M&S but they are not so good quality, the material is much thinner.

rhomboid1

I think the biggest challenge that Marks and Spencer (LON:MKS) faces in clothing is that a large part of its traditional 50+ aged demographic are quite happy/desperate to keep in shape & dress in similar clobber to a twenty something ...so the supply of new grey pound punters is far less clear cut than in years gone by.

doublelutz

When I look on here many people seem to reference buying fairly cheap clothes, even Paul. What do the successful investors do with their profits. Just reinvest them! What is the point in making money if not to spend!

That is absolutely correct. My wife is coming up for 70 and wouldn't dream of buying clothes from M&S. Not everything she buys is expensive but it has to be "edgy" and not what an older person would traditionally wear. M&S certainly have nothing to offer her.

potter12

I agree, there is an air of economy about a lot of investors. I'm amused when cheap hotels are discussed in planning for an Investment Show. When I made my first big investment profit I bought a new Porsche 911.

Sadly now, a lot older and wiser, I've got a more modest saloon.

brballs

Panamera? ;)

jonthetourist

I like good hotels and have been lucky enough to stay in a lot of them. My room in the Beverley Wilshire (think "Pretty Woman") had two complimentary bottles of champagne waiting for me, which was a 1st.

But if I go to Mello all I need is a clean, convenient room to sleep in. Most investorsI know think similarly, and we are all capable of spotting a good rate too. If you can't perceive a benefit, why waste your money?

Jon

FREng

Sosandar (LON:SOS) and its other brands advertise very visibly in central London underground stations.

"other brands"

I thought it was just the one brand?

skinner66

just back from london nice stay, and quiet for this time year shops i mean't, hyde park was buzzing winter wonderland,, went in few stores and quite,, but bargains not on offer as previous years, most same price. my daughter is manageress jd sports and says not many items on sale. which backs up what i see in oxford circus and tottenham court road. dont look good for retail i think. as norm jan there worst trading. covent garden travel lodge £45 boxing night, cheaper than most b&b at seaside resorts.. guess they need fill rooms and hope spend on drinks and food also keep staff employed,,

Zipmanpeter

Paul,

Thanks for reports all year and please consider leading a special "State of the Union" article in January to discuss the state of retail specificallyl. I believe there are some bargains now amid the wreckage but would value your insight and thinking about some broad themes for 2019 as you did

Personally, I think you are wrong on Marks and Spencer (LON:MKS) : we have to see it in terminal decline - although that process may take many years yet, such is its strength and history.

The reason is that just as it has legacy physical stores that will take a lot money to fix/change and which distract it away from the best future opportunities, so does its brandstrength with the, 60+ (ie I think not even 50+) shoppers. I'm 52 and M&S feels an old brand with cheaper options elsewhere!

This is what holds it back in fashion and clothes and why a series of great marketing and product directors have failed to turn it around. The choice and competition from online retailers is too strong now to provide new recruits and thus the brand ages creating a viscous circle.

M&S Food sprang from the same brand but is a newer business and offered genuine innovation for a time but is now struggling as the brand weighs upon it and scale, more important in Food I believe than fashion, counts against it - especially as Aldi/Lidl continue to deliver lower prices and high if not highest quality.

Next (LON:NXT) may face a similar issue in 10-15 years but has perhaps learnt from MKS and is evolving the next platform to include other brands as well as its own. Superdry (LON:SDRY) is more at risk being such a fashion led led brand but I believe strong enough to leap from that to become become a minor global lifestyle brand

Sosandar (LON:SOS) are at the other end. Born online, distinctive and so small they only need to connect with their given target market.

Disc. - long on Next (value), very long on SOS (high risk/reward) and tempted by Superdry (LON:SDRY)

Mark Stabler

Hi Paul,

What do you think about Julian Dunkerton trying to take control of Superdry and reinstate him as a director.

The companies sales have continued to grow since he stepped down as chief executive in 2014 the shares have continued to fall and he has played a big part in both but perhaps its time for him to let another team grow the business he started...nothing is stopping him starting another company that is what fashion is about but brand and global growth is a little different and perhaps that needs a different team.

I hold the shares because of the Brand strength what Dunkerton started but quite like what the existing team are trying to achieve with new products and digital marketing moving forward and can see a much better position and future in say 2...5 years time.

Interested in your views and others.

Small Cap Value Report (Thu 27 Dec 2018) - EPO, SDRY, SOS, PLUS, BGO

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Paul Scott

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