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

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 big question though is whether MKS can get its act together with its womenswear product, which has been poor in recent years.

There are a few bits of news today, then I need to circle back and finish off my last report before Xmas on Ideagen (LON:IDEA) , which failed to gain take-off velocity unfortunately.

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Earthport (LON:EPO)

Share price: 29p (up 289% today, at 09:21)
No. shares: 623.5m
Market cap: £180.8m

Recommended cash offer

No, it's not April 1st, this is real. Long-suffering shareholders in this international payments company are being put out of their misery, with a generous cash offer of 30p per share.

That's a tremendous 250% premium to the previous share price. Although as pointed out in the RNS, it's a lower, 50% premium, to the last placing price of 20p.

The company has made heavy losses continuously for many years, and diluted its shareholders many times, with repeated fundraisings.

Still, VISA clearly likes it, being the buyer at 30p. To say I'm amazed, is putting it mildly. Shareholders get the last laugh, although there was nothing in the company's terrible long-term  financial performance to indicate that the company had any value.

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Plus500 (LON:PLUS)

With a market cap over £1.5bn, this is really outside our scope here. Despite that, neither Graham nor myself can resist commenting on this fascinating company's updates.

Today it issues yet another positive update, following on from a previous positive update on 20 Nov. Strong trading has continued to the year end.

The PER of 7, and 11.5% dividend yield, are shouting to us that investors do not believe that the profits, cashflows & divis are sustainable. If the market is wrong, and these numbers are sustainable, then the share price would have considerable upside. I've really no idea what the eventual outcome is likely to be here. So if in doubt, I tend to steer clear.

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WANdisco (LON:WAND)

A contract win is announced. It's only $700k, which wouldn't normally be of interest. However the text also talks about the relationship with IBM becoming closer.

Could this be another Earthport I wonder? i.e. a company which persistently loses money, misses its forecasts routinely, and constantly promises jam tomorrow, yet eventually gets bought out by its main commercial partner? With Earthport that was VISA, and with Wandisco, it's IBM.

There was another example of this kind of thing recently, when a small software company called FreeAgent, was bought out by its main commercial partner, RBS.

This has got me thinking, perhaps we ought to pay more attention to companies which establish close partnerships with big companies? That does seem to increase the likelihood of a takeover bid.

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Bango (LON:BGO)

Trading update

For calendar year 2018;

• End user spend more than 100% up (this is almost all pass-through revenue, with Bango taking a small cut)
• Positive EBITDA in Q4, but negative for the year as a whole - so below market expectations
• Revenue from several new contracts will be recognised over a longer timeframe, and not up-front
• Cash at year end of $3.5m, said to be enough to fund the group to profitability
• Positive outlook comments

My opinion - very strong revenue growth, but no profits yet.

I don't know how to value the company, as I've no idea whether it is likely to achieve forecasts or not. Share have dropped by more than half in recent months, along with a lot of other highly valued, jam tomorrow growth stocks.

You really need to properly understand the business model, and competitive landscape, to be able to value a share like this. So that puts it in the "too difficult" tray, for me.