Small Cap Value Report (Thu 28 Oct 2021) - FOXT, SPEC, VARE, FTC, VINO

28th Oct '21 by Paul Scott

39 comments 8432 reads

Good morning, it's Paul & Jack here with the SCVR for Thursday. Today's report is now finished.

Agenda -

Paul's Section:

Foxtons (LON:FOXT) - the London-based estate agent reports surprisingly robust London housing market, with lettings and sales recovering strongly - including rents back up to pre-pandemic levels. That's encouraging for a wider recovery in London activity I reckon, although it remains to be seen how many office workers will continue working from home?

Various Eateries (LON:VARE) - an expanding chain of all day "clubhouse" type bar/restaurants called Coppa Club. There's a bit too much PR spin in today's update for my liking. LFL sales are good, but it glosses over the benefit from temporarily lower VAT, and fails to mention its related party debt, preferring to only mention gross cash - selective reporting that raises my hackles. Market cap of £72m looks a stretch, given that it only has 12 sites, and no track record of profitability yet. But, both customers and investors like new formats, for a while.

Filtronic (LON:FTC) - a reassuring update, in line with expectations for FY 05/2022. Trouble is, the expectations are for only £0.5m profit. No divis for years, and lumpy performance, makes me struggle to understand why anyone would want to own this share. Do explain in the comments section, if there's something great about Filtronic which I've missed.

Virgin Wines Uk (LON:VINO) - results for FY 06/2021 look good, especially when £3.5m IPO costs and pre-IPO finance costs are adjusted out. Growth has slowed from c.30% to c.13% in the new financial year though, now that tougher comps are annualising. Valuation is probably a bit higher than I personally would want to pay, given likely slower growth in future. But overall, it looks a decent company.

Jack's Section:

Inspecs (LON:SPEC) - vertically integrated eyewear and lens manufacturer. Recent IPO that has since made a large acquisition, transforming the revenue profile, but margins are low and the company is loss-making, so wider supply chain issues and cost inflation could be a concern.

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…

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coniston

28th Oct '21

Interactive investor mobile 6 digit security number.

Had problems yesterday regarding above,apparently if you have Virgin mobile. Solution was to temporally remove 6 digit security when logging in.

timarr

I believe this is an EU ruling.

It is for online electronic payments and access to bank accounts but not for anything else. It was adopted into UK law and that's not likely to change, for good reasons. It's not a requirement for other services, like brokers.

As a general statement two factor authentication using a mobile phone as the second factor is a good thing as it makes account takeover very hard. Using an email address / password as the second factor means that you'd be using two knowledge factors (password for online account and password for email account) which exposes you to a number of relatively simple attacks. It's also not allowed for payments, although many banks are breaking this rule.

The best option is to use a properly designed and tested mobile app. Done well that's more secure than an SMS, and only requires wifi, not a mobile signal.

As always this comes down to a balance between ease of access and security. Personally I wouldn't use any service backing significant amounts of value that doesn't require strong two factor authentication. The minor inconvenience of the second factor is vastly outweighed by the risk of losing a significant amount of money.

Having said all of the above many companies have terrible support for situations where phones are lost, changed or stolen or where people have limited access to mobile networks.

For info I have a credit card with them and a savings book account. I don't have a bank account as such with them. Not sure if that matters?

It's required by law on any payment account. That definitely covers a credit card. It's arguable on the savings account.

A One Time Password generated using a card reader would be a perfectly acceptable second factor.

jamesalastair

I completely agree with everything you have said.

sharw

I agree with your comments on accessing a ii a/c - probably implemented by someone in the younger generation that have phones surgically attached. Most other organisations provide an alternative - usually either email or landline phone where you use the keypad to relay back a number displayed on your screen - alternatively you have a device like the one mentioned by ISAallowance (I have one from HSBC).

So if others can do that why can't ii? (or, come to that, the Yorkshire and Principality Building Socs.?).

Gostevie

Re £VINO

There is a phrase "if you ask a stupid question, you will sound stupid once, if you don't ask the question you will always be stupid", so here goes.

Does Virgin Wines have any connection with Richard Branson's group of companies, and if so, what? Or is it just a similar name?

Tommy H

Going on all the other "Virgin" branded products, typically they pay him a fee for using the name...

mojomogoz

Ahh, React (LON:REAT) -> yet another share I’ve been accused of being too negative on in the past ;)

The React short term letdown has been telegraphed for a while...I’m surprised there’s surprise. But today’s TU is further let down. 10% fall in sp is not a big deal...I wonder if people have dug into the announcement well? I think the price response is undercooked and we'll see more fall/drift. This could go under 1.5p imo (not a forecast) due to earnings/cash concerns. Some issues of concern:

Today's TU release infers some significant negative inflexions in trading for the core React ex Fidelis cleaning business. The issue is whether it is structural or short term. There isn't evidence to support short term blip hypothesis at the minute (given early stage turnaround and benefit of covid to reactive work) so the price pressure is likely to persist. Some significant insider or big holder signalling is probably the sign that future is more assured (note the only signal in H2 was NED selling >1/3rd of holding at 3.4p in May!).

Half on half fall in EBITDA (H1 £420k vs H2 £330k) despite both organic revenue growth and acquisition of profit/cf positive and growing Fidelis for all of H2 indicates that gross margins have been hit hard in H2 2021...TU could do with contextualising that rather than leaving it hanging. It looks like it all comes out of the React side of business and not Fidelis who are reaching for earnouts on EBITDA targets for their year to March 2022…

There’s a contingent payment to Fidelis of up to £3.05m if they hit £1m EBITDA for their year to end of March 2021 (note this is the old annual accounting period for Fidelis as independent).

Only the annual report will tell us exactly how much H2 2021 was a damp squib for React ex Fidelis. The comparison is approx £2.25m revenues for H2 2020. H1 2021 saw 20% YoY growth and the total inc Fidelis is 20% organic YoY for 2021. As Fidelis is reported as particularly strong it implies that React ex Fidelis is not holding up its side of 20%. 20% organic on 2020 is £872k extra revenue.

Note, its possible that the meaningful reduction in expected EBITDA (from £850k to £750k) despite revenue being just slightly below expectation could relate to the accounting treatment for contingent liabilities connected to earnout payments to Fidelis. If they are overshooting their target then balance sheet recorded contingency of £2.1m moves closer to the £3.05m max. Any recognition of that in period would come through profits. In addition, this might also partly explain why the cash performance is poor (Allenby now expect £567k year end cash rather than £896k, ie £329k reduction) as depending on the schedule for payment of the expected £2.1m further consideration (but up to £3.05m if very good performance) then extra cash than expected might have gone out the door to Fidelis management. The cash plus EBITDA shortfall on half is c.£430k and that is roughly half the increase that would be seen in contingent payout to Fidelis for exceptional performance. Its an analytical faux pas to conflate all these items perfectly...but I believe there is likely strong hints in this. Good or bad then?...

Well, React ex Fidelis underperforming and Fidelis compensating for its is a nice steady state balance. However, Fidelis outperforming draws on more cash from the group to pay out Fidelis. That’s not so good as a draw on cash resources (and remember Fidelis owners specifically want to paid cash to ‘realise wealth from their work over 10 years’ and don’t want equity) to pay Fidelis sucks out cash for investment to grow. React ex Fidelis needs to put in good cash generative performance to pay for Fidelis and investments to grow broad biz. There’s hints of capital raise to come in this...unless React ex Fidelis turns around sharpish.

React are also paying the price of too much hype too quick. Mgt talked up the biz a lot late last and early this year. This now looks like simply a desire to trigger full options/warrants payout at (I think) c.2.8p ...job done, free holding banked...so now PIs got to suffer the reverse disillusion effect. And…

...given just how loquaciously keen React were to talk to market before now on many matters its a shame they haven’t been able to be ‘open and honest’ on their current situation and have us holding off until January in the hope of game changing luck.

Your mojo, out

(There’s quite a lot of info to parse with React and haven’t done it yet and above done quickly...I’ll notify of any changes)

Rusty2

At home it is not usually a problem as long as the phone is working but if I'm travelling it could be a major issue, not just trading stocks and shares but also doing credit card bookings. I agree some platforms the service is not all good. Of course most don't also have free phonelines now, so it can get expensive as well as time consuming. HL you get logged out every minutes, unless you are actively using the site, I even get logged out even when I am using it. Looking at IG the App has bad reviews, many warning not to use otherwise can't access their accounts. Not everything is supported only iPhone, iPad, or Android device.

I did not have a mobile for 1 week.

At home it is not usually a problem as long as the phone is working but if I'm travelling it could be a major issue, not just trading stocks and shares but also doing credit card bookings.

Hi Ray

Most High Street banks or credit card companies should offer an alternative to SMS although you may have to chase to find this out. There's still quite a large cohort of mainly elderly people who don't have mobile phones, and they also need to cater for people who are visually impaired. Lloyds, HSBC, etc are obliged to offer non-mobile based second factors. Smaller payment institutions may not.

For brokers and other non-payment companies the decision to require 2-factor authentication is a service issue - but frankly, if they don't offer an alternative they should expect to lose customers. Personally I wouldn't use a broker that didn't offer 2FA, there's too much at risk.

On a mildly amusing note John Authers ended his newsletter today by describing how he clicked on a phishing link while distracted. Fortunately for him it was an internal test, but it's easily done and that's all it takes to expose yourself to account takeover. 2FA makes that more difficult - not impossible, but most attackers will go somewhere else.

JohnEustace

Ray,

You can edit your timeout preferences on the HL platform. Go to Your Account > Passwords and Timeout Preference.

I looked at that, it says not possible to change from 5 minutes.

React (LON:REAT)

Correction: There’s a contingent payment to Fidelis of up to £3.05m if they hit £1m EBITDA for their year to end of March 2022 (not 2021) (note this is the old annual accounting period for Fidelis as independent).

Logical David

"Of course most don't also have free phonelines now, so it can get expensive as well as time consuming".

Hi Ray,

Have you tried using the website:

www.SayNoTo0870.com (all one word)

I use it all the time and I've used it for donkeys years to lookup freephone 0800 numbers or 0300 numbers or 01 or 02 landline numbers. Just enter, either the company name or enter the expensive premium rate number to find an alternative free or local call rate number. As you probably know if you have a mobile contract with inclusive minutes then 03, 02 & 01 numbers are free and part of your inclusive minutes.

David.

Yes Paul, when I watched React (LON:REAT) present at Mello my opinion was that the share price was being ramped. My perception is that REAT is a low margin cleaning company.

I don't Hold.

yes I have used that site but a lot of 0800 numbers have gone recently. I only have PAYG mobile.

BnB

Don’t worry, I wasn’t suggesting there’s no room for competition. Simply that if the big’un and the littl’un have similar growth prospects and valuation, then I’d feel more secure owning the proven quantity. Risk vs reward and all that. But EL possibly performs a different role in my portfolio (defensive growth) than Inspecs (LON:SPEC) (small cap growth?) plays in yours. Noting the execution risk with the inevitable M&A-driven expansion, Inspecs looks interesting - there are terrific drivers for multi-decade sector growth.

29th Oct '21

I too only have PAYG mobile but that could change. Being retired I don't make many daytime calls so for a long while I have had an evenings and weekend package on my landline. A few years ago there was a tipping point when daytime calls became cheaper on the mobile than the landline so such calls (in my case usually emergency calls to the dentist!) are now made by mobile. I now have received an offer of anytime unlimited calls and texts on my mobile that is approaching the evenings and weekends landline package cost so another tipping point is coming.

abtan

Virgin Wines Uk (LON:VINO)

I don't hold this one, but I did think about opening a position.
Some thoughts:

1 - Older Cohorts (+ve)

Pre-FY18 Cohort revenues are fantastic, with £32m-£34m of revenue each year for the last 3 years:

I imagine marketing here is minimal - perhaps the occasional discount/promo - so presumably these cohorts are quite profitable - and recurring - for the company.

I've made an assumption on fulfilment costs from the IPO Admission document (37% from FY20) , and in my opinion the pre-FY18 cohorts alone justify the current market cap:

2 - Payback Remains Very High (+ve)

3 - Recurring Revenue (-ve)

There seems to be a slowdown in Active Subscription Customers from H1 to H2, in addition to a rise in non-subscription customers.

4 - Geography (-ve)

My main reason not to buy would be the focus on the UK market only.

The company states that they already have 10% of the £750m market (wine bottles >£6), which I can't imagine is growing very fast and is likely subject to intense and/or growing competition.

This makes me question where the growth is going to come from, which leads me too...

5 - New segments (+ve)

Beer/spirit services were recently started and I must admit to being impressed by the growth here (albeit from a small base.)

Perhaps the opportunity might not be so great, but at the very least it dispelled my preconception that there were few avenues for growth.

---

I started writing this with the intention that I would not buy, but I think that I might have convinced myself otherwise.

The company has a very strong underlying recurring revenue, which alone supports the share price, alongside a market that will grow, with potential to move into other segments.

Given the decent levels of cash generation and lack of debt I also think international expansion is probably (or rather hopefully) just a matter of time.

I think that they are too far behind to catch up with Naked Wines in the States, who have a very impressive US logistical infrastructure already, but I imagine that there's still some room for smaller companies like Virgin Wines Uk (LON:VINO).

I think a purchase here might not be a bad idea.

wildshot

3rd Nov '21

ISAallowance, I thought you might appreciate an update. I received a letter today from Nationwide that apologised for them incorrectly informing me on the online chat. The letter confirmed that I can set up for online banking with a card reader device. I've begun the registration process online and hopefully will be set up within a week or two.

Thanks for your informed detail, you know more than the rep I spoke to the other week.

Small Cap Value Report (Thu 28 Oct 2021) - FOXT, SPEC, VARE, FTC, VINO

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Paul Scott

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