Small Cap Value Report (Thu 4 Jan 2018) - DEB, SPE, CHH, CAMB, WGB, TAP, ENET, BHRD, CYAN

3rd Jan '18 by Paul Scott

69 comments 23664 reads

Good morning, it's Paul here.

Please see the article header for the companies whose trading updates I am covering today.

Debenhams (LON:DEB)

Share price: 28.9p (down 18.8% today)
No. shares: 1,227.8m
Market cap: £354.8m

Trading update - the department store group announces trading for the 17 weeks to 30 Dec 2017.

The problem with updates from retailers, is that too much emphasis is put on like-for-like ("LFL") sales. However, there is no consistency in how this measure is calculated - some include refurbished shops (e.g. Moss Bros (LON:MOSB) ) which I think is clearly incorrect. The whole point of refurbishing a shop is to increase sales, so it's not a LFL comparison once it's been refurbished. Other retailers merge retail sales and online sales in their LFL calculations, which muddies the water. Farcically, Mothercare (LON:MTC) even reports customers in-store ordering on one of their tablets as online sales!

For these reasons, I'm increasingly just focusing on forecast profit. After all, that takes into account everything - sales, gross margins, and costs. The guidance given today is as follows;

Looking ahead, should the current competitive and volatile environment continue into H2, FY2018 profit before tax is now likely to be in the range of 55m to 65m

To put this into context, timing-wise, FY2018 is the year to end-Aug 2018.

Broker updates - I've got several in my inbox this morning. To give a flavour, one has reduced its PBT forecast from £79.0m to £55.4m - a reduction of 30%.

The key thing is to consider that this is based on forecast revenues of almost £3bn. So Debenhams profit margin is wafer thin, at about 1.8%. What that means, is that only a small further deterioration in sales & gross margins could easily tip the company into losses, and possible insolvency (if shareholders refuse to refinance it).

More details from today's RNS;

Digital sales are up 9.9%, giving 2 year growth of 22%. So optimists might latch onto the possibility of Debs transforming itself into an eCommerce company with some big stores also acting as warehouses. The new CEO is ex-Amazon, so who knows what might happen in this area?
UK LFL sales down 2.6% in the 17 weeks to…

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herbie47

5th Jan '18

What metro? What about a normal car park, do they have chargers everywhere? Or in the street. How many work car parks have chargers? Maybe some for directors? It may happen but it's available yet. Yes you can go to a supermarket but what if they are all being used? Also in my area no supermarkets have any charging points, so I don't think it's as easy as you make out.

timarr

Hi Dave

Sort of, but not exactly. If they hold the IP address, even in encrypted form, then it must be because their systems can recover it in order to compare with the incoming address of a phone - which would be caught under GDPR (probably, this is all legal stuff)..

What they actually need to do is generate their own ID from the phone data which no one can match with personal data held in someone else's database.

It's all a bit nerdy and esoteric, but it the kind of thing lawyers and security experts are worrying about right now.

timarr

Hi FREng

The argument is that the IP address that Taptica International (LON:TAP) hold, along with non-personal data, can be matched to an IP address that someone else holds (e.g. the MNO) along with personal data. So I think as long as their fingerprint is not some form of standard that's widely used elesewhere they would probably be OK.

But it's not absolutely definite, either way.

timarr

rogergreen

Monster job thanks Paul!

I notice that CAMB chairman just sold 1/3 of his shares citing house purchase. Not sure how far £57k goes in a house purchase these days, but not the vote of confidence we (holders!) are looking for.

Rgds
R

RMundy

Hi all, interesting comments regarding EV and charging.

I would expect many houses will adopt home batteries over the next few years which, when combined with solar, have a huge impact on smoothing out that peak demand on the grid in the early evening.

Fully Charged have a great video on this (https://youtu.be/nWLzlrGGuxQ).

The presenter Robert Llewellyn's house has solar panels and a Tesla Powerwall meaning he uses almost zero grid electricity during the expensive peak hours now:
- The solar charges the battery during the day,
- The battery powers the house during the evening,
- Then at night the low-cost Economy 7 tariff and the remaining battery charge can top up the EV.

The battery has enough power output (5kW) to comfortably cover the highest conceivable load from the house (ie kettle, dishwasher, etc).

Power providers will love this trend because if you smooth out the power demand then less plants like gas-fired turbines are needed for the spikes. These plants sit redundant most of the time and are therefore expensive and inefficient uses of capital.

Bring it on I say!

daveinthelakes

The ads are not email but appear on your facebook etc page. You and I may not be typical facebook users but I think the average user doesn't mind ads about products they may be interested in. After all it's little more than like buying a newspaper where adds sit alongside every bit of editorial, we don't have to read the ads. We have to pay for newsprint but facebbok etc is free-some would say a small price to pay.

Most house in the UK don't have solar, I think it's around 7%. Even ones that do will only produce about 3kw per day. Yes batteries will help. How much to charge up an EV about 50kw?

simoan

Paul,

Re: Ethernity Networks (LON:ENET). I'm familiar with the company and understand the market they operate in. I can vouch that this is a proper company with real products and customers - it categorically is not one of the dodgy overseas AIM companies we have seen down the years. Whether you believe it is investible is down to you, but one of the reasons I would stay clear is the nature of their customer base and it is unfortunate that this has been highlighted so soon after the IPO.

I know its bad form to warn so soon after listing, but I know from personal experience working with large Telcos that the reason for the delays leading to the warning was very likely completely unforeseeable 6 months ago. Short of working with government departments, I cannot think of anything worse than having large Telcos as your main customer base - these are the least efficient, most bureaucratic and slowest moving organisations known to man. Their internal management structures are appalling, their procurement processes prolonged and painful in the extreme for all concerned, and they are the slowest paying companies on earth.

All the best, Si

Very true regarding the solar coverage, although my inner physicist just wanted to come back on the kW numbers.

A typical roof with solar produces around 3-4kW during the sunlight hours. So over the day that amounts to 24-32kWh (assuming 8 hours of sun, ie 3kWx8hrs and 4kWx8hrs).

EV batteries range from around 30-85kWh of storage. A typical Tesla is 60kWh.

So one day's solar energy on a typical roof (24-32kWh) should fill up 40-50% of the 60kWh car battery, assuming of course nothing is used in the house, which I admit isn't realistic.

Please do let me know if I've got my numbers wrong though as I always used to get confused with kW and kWh.

Regarding solar coverage, 7% of UK houses is about right from what I've read. 1.5 million homes vs total number of UK homes of c. 25 million if memory serves. Not saying this will happen overnight but that 7% will grow significantly as cost of photovoltaics continues to plummet.

Cheers
Rob

JTG

We will buy an EV in 2018, while there is some residual value in the diesel we'll sell, which we suspect will be unsaleable in 2 years. Range is now sufficient for 70 mile there-and-back journey, and we are blessed with a second car to keep for the occasional long journey. People should be careful about 'range anxiety'. The majority of people buying now do ALL charging at work or home. We will night charge on automatic timer and NEVER think about topping up or waiting in line at a filling station in this car. Seems easier to me. And by the way, the evidence is that batteries are lasting longer than predicted. There are companies ready and waiting to re-use car batteries for static storage, but there is isn't enough supply, because they're going on too long.
OK, we're middling-early adopters, but another two years of battery progress and the penny will drop. And by the way, filling at night does not tax the Grid, just evens out its flow. NG estimate 2m EVs are needed before they have to think about it.
As for auto dealers, I'll not be investing. Not only will it become more complicated to shift secondhand cars for many £000s, EV service is cheaper, and I think it ever more likely that the manufacturers of these 'computers on wheels' will sell direct, as the expertise is more firmware/software than physical intervention.

The heat pump problem is over. We had an old one, from 2006. In our new house we installed from the first batch of soft-start inverter-driven pumps. This does more than the first generation off a standard power supply, 30 amp fuse, like a cooker. They'll all be like this soon, I'm sure.
Now we just need to get people in Britain to demand invert-driven fridges/freezers, like we have in Costa Rica, and the loading will actually get easier.

Graham Ford

I think that focusing on where EV charging is going to be a problem risks missing an opportunity. Inevitably it is starting as a niche. But given the number of vehicles on the road it is a sizeable and growing niche.

Fret not about terraced houses or flats where people cannot park the vehicle for overnight charging, or rural areas where range becomes a problem because the places where it can work are more than sufficient to represent a large potential market.

That said, it doesn’t mean I would buy Tesla!

Thanks, maybe I misunderstood the kW, did find this "An average 4 kW solar panel system will generate around 3,400kWh per year" so about 9kWh per day then.

I thought solar companies were going bust after the Govt. reduced the subsidiaries? Certainly I have had calls recently about it. I did look at solar about 3 years ago but it was about £10k and that was before the EU added VAT onto it. Yes I could probably get it for around £8k but my roof gets some shading in winter, at the time it did not seem worth it but I may revisit it in the future. Maybe everyone will be switching to electric heating?

Herbie,

I think from a purely economic perspective you need to commit to keeping a house for at least a decade to justify a solar installation. I doubt if when you sell a buyer will pay you £10K extra because it is installed. The property market doesn't tend to work that way. Yes it will be a selling point but looking at two identical properties, one without, one with solar at a £10K higher asking price, most will go for the lower priced option.

Dave

""An average 4 kW solar panel system will generate around 3,400kWh per year" so about 9kWh per day then."

Yes that might be more realistic... My numbers probably stack up in southern Spain but perhaps a tad optimistic for the UK... Well I am an ex research analyst so maybe over-optimism is to be expected.

9kWh/day could assume the 4kW system runs at only 2kW in our climate, and for roughly 5hrs a day. My parents had some installed about 8yrs ago. They cost £15k but the feed-in-tariffs back then were amazing so it yields over £2k pa and had a 7yr payback period, so a 13% ROI.

The wife and I were quoted £5k late last year which shows how much costs have dropped, but feed-in-tariffs have come down too, from 15p down to a miserly 3.5p/kWh now. When you take electricity bill savings into account the payback period looks to still be around 7yrs now on my numbers, which is fantastic.

Anyway, to bring it back to equities (before I get told off by Paul & Graham), I agree with other comments that there are lots of hurdles to mass-adoption of this new technology but none look insurmountable and it is increasingly hard to see how the established 2nd hand car market, the auto-service industry, the supply chain and so on aren't going to be under severe pressure over the coming decade.

Have a great weekend all,

Yes I quite agree that is part of the problem. Also some people don't like them on the roof, I can see why, so it may not be a plus selling factor.

Gromley

Actually, I find this quite sad and is not what the ethos of the SCVR is about. One of the main attractions of Sopheon (LON:SPE) to me was that it is completely under the radar of everyone and experience has shown me that this is where the most money is to be made

Good point Simoan and well made. I certainly would want to discourage anyone, it's just for me personally with so many stocks to potentially investigate further; there is no real economic sense in spending much time on a stock that I would be highly likely to reject anyway.

I learned sometime ago on a pyscho-babble management course that I tended to over analyse things even when I had a strong initial gut feel so I tend to follow my nose a little more these days - at least in terms of the negative decisions.

Interesting your views on the standard of the Fool articles by the way. It's a good few years since I wrote a few articles for them but even back then, there was a bit of pressure towards writing "click-bait".

TMF with it's original ethos of teaching people to take control for themselves was quite formative in terms of my investing. It's sad that they didn't invest in developments that the could 'monetise' (other than tip sheets). With the closure of the message boards over there I don't really see there is anything left of the original ethos and I certainly don't think the target market for the articles is particularly towards the more "sophisticated" investor. (In fact Stocko feels like the natural successor to the original TMF)

(No offence intended to any of the MF writers around these parts, I understand that you are writing to a brief).

Anyway to come back (in the end) to Sopheon (LON:SPE) - I think you suggested that the high level of receivables (4-5 months of revenue I think) might be down to conservative accounting. I didn't really get that - surely if they are recognising loads of revenue that is not yet collected (even though believed to be earned) surely that's the opposite of conservative?

On this score I would wonder whether there is a risk of customer disputing what is due and also whether the upcoming FRS changes to revenue recognition will impact them.

Loved your MF article suggestion btw. As coincidence would have it, my daughter is actually called Sophie and as she can sometimes be somewhat "blonde" I often ask what's Sophie On. And this indeed wraps it up she's great company but has cost me loads rather than made me money. (clearly not a good investment omen)

6th Jan '18

I agree, and I have a highly sensitive BS detector too! However, that's not really an excuse for not looking further at what a company does. Some companies, like it or not, do have products that are not easily explained to a layman and so some investors put it in the "too hard" pile and move on as you have done with Sopheon (LON:SPE). This is how it should be i.e. those prepared to put in the hard yards have an advantage. Let's face it. it's pretty obvious from reading threads about IQE (LON:IQE) that most people invested do not really have a clue what it does but were maybe happy to jump on a bandwagon, most people invested in ARM didn't really understand its products etc.

I guess I have a slight advantage that every day I work with large multinational technology companies with project teams working at different sites all around the world, so I can easily see a need for the software products and consultancy that Sopheon (LON:SPE) provide. It's almost embarrassing how these companies work with the arse not even knowing that the elbow exists! :-)

On the receivables, clearly with software companies receivables is open to some interpretation and the policy will differ from company to company. I agree the receivables are high for Sopheon (LON:SPE) at roughly 6 months sales but this has always been the case. They have a mixture of revenue streams from software licensing, recurring maintenance fees, and ongoing consultancy so it's difficult to get a handle on but given the nature of their large multinational customer base this is probably more to do with the way these companies pay than hiding any bad debts.

As for The Motley Fool, the original ethos was great and there are many of us around that learnt a lot in the early days, however it became something it shouldn't have and now the editorials are embarrassing. Really, Stockopedia only exists because TMF screwed up and failed to monetise it's users in a way that added value for the vast majority of them. So of course, like many others, I'm really glad and thankful that Stockopedia exists, and long may it prosper.

smatthews1

"...I think it ever more likely that the manufacturers of these 'computers on wheels' will sell direct, as the expertise is more firmware/software than physical intervention."

Sounds like a perfect opportunity for a car manufacturer/dealership to service your car and send you a bill with the description 'software update'. Given the recent reports on Apple slowing down there old iphones, who knows what tricks the car manufacturers could get up to.

Hi FREng

Tick-boxes won't be sufficient, and consent has to be sought transparently for each separate use of the data. I believe that the ambulance chasers are tuning their engines ... the penalties under GDPR are so severe - up to 4% of global annual revenue - that many companies will be prepared to pay off complainants rather than risk sanctions.

And consent is only half the issue - data breaches are potentially subject to fines of up to 2% of revenues. Which may sound like the lesser problem but if a company loses emails and passwords which then allow hackers to attack third-parties - as in the originally undisclosed Yahoo breach - then the third-parties can sue the source of the breach for their damages, and that's before consumers launch class actions.

GDPR is one situation where you don't want to be asking for forgiveness when you get it wrong. I expect the regulators to make a few very high profile examples in 2018. I certainly wouldn't want to be a non-EU company who gets this wrong.

timarr

Small Cap Value Report (Thu 4 Jan 2018) - DEB, SPE, CHH, CAMB, WGB, TAP, ENET, BHRD, CYAN

Debenhams (LON:DEB)

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Paul Scott

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