Small Cap Value Report (Thu 4 July 2019) - ABF, SOS, JSG, GHT

Thursday, Jul 04 2019 by

Good morning, it's Paul here, for Thursday morning's report.

Please note that I was adding new sections to yesterday's report all day, up until finishing at 11:30pm! So it covers 10 companies in total. The new sections added later in the day/evening were: LoopUp, Redde, Topps Tiles, The Works, and Purplebricks. To see the full report, please click here.

Associated British Foods (LON:ABF)

Primark - is owned by ABF. It's a large cap obviously, but noteworthy for its comments today about retail. When the woes of the High Street are mentioned, it's often the internet that is blamed - rightly so, as something like 20% of retail sales in the UK have migrated online - devastating for physical retailers.

However, few people mention the impact on other clothing retailers & department stores, of the astonishing success & expansion of Primark. I think Primark's success probably had a lot to do with the demise of BHS, for example. Primark will also have eaten into the market share of many other retailers too. It's classless too. Plenty of middle class people shop there, jokingly calling in "Primani", so it's not just the lower priced chains that will have suffered.

I always used to buy my basics from M&S, but now get them from Primark instead, at about a third of the price, for product which does the same job. Only the other day, I bought a rucksack full of holiday basics - 15 pairs of socks, 6 undercrackers, and 4 swimming shorts, all for about £36. Why go anywhere else, and pay vastly more?

This is what ABF says today about Primark recent trading;

Sales at Primark in the year-to-date were 4% ahead of last year at constant currency and actual exchange rates, driven by increased selling space partially offset by a decline in like-for-like sales.
In the UK the sales growth recorded in the first half continued in the third quarter and Primark recorded a further significant increase in market share. Like-for-like sales were held back by unseasonable weather in May which compared to a favourable market environment in the corresponding period last year. We have seen an improvement in sales in June

That echoes the comments made yesterday by comparatively miniscule Sosandar, giving credence to what they said.

Weather is very important for clothing…

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Associated British Foods plc is an international food, ingredients and retail company. The Company's segments include grocery, sugar, agriculture, ingredients and retail. Its geographical segments include the United Kingdom, Europe and Africa, the Americas and Asia Pacific. The grocery segment manufactures grocery products, including hot beverages, sugar and sweeteners, vegetable oils, bread and baked goods, cereals, ethnic foods, herbs and spices, and meat products, which are sold to retail, wholesale and foodservice businesses. The sugar segment is engaged in growing and processing of sugar beet and sugar cane for sale to industrial users. The agriculture segment manufactures animal feeds and the provision of other products and services for the agriculture sector. The ingredients segment manufactures bakers yeast, bakery ingredients and enzymes, among others. The retail segment buys and merchandises value clothing and accessories through the Primark and Penneys retail chains. more »

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Sosandar PLC, formerly Orogen PLC, is a United Kingdom-based company that operates an online women’s wear platform. The Company’s clothing categories include dresses, jackets and coats, knitwear, shirts and blouses, tops, skirts, trousers, jeans, leggings, footwear, leather and suede, occasion wear, work wear, autumn trends, velvet and holiday shop. Its footwear products include Pewter Metallic Chelsea Boot, Red Leather Ankle Boot, Velvet Cylinder Heel Ankle Boot, Black Leather Stud Detail Ankle Boot, Black Suede Closed Toe Mule, Grey Velvet Court Shoe With Jeweled Brooch, Black Suede And Pewter Metallic Court Shoe, Black Leather Front Zip Ankle Boot, Leopard Print Leather Chelsea Boot, Steel Blue Leather Snake Print Ankle Boot And Black Suede Knee Boot. It also offers latest edit of day-to-night dresses, on-trend separates, luxe leather and outfit-topping shoes through its platform. more »

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Johnson Service Group PLC is a United Kingdom-based company that provides textile rental related services. The Company is the supplier of workwear and protective wear. The Company operates through Textile Rental segment. The Textile Rental segment is engaged in the supplying and laundering of workwear garments and protective wear; linen services for the hotel, restaurant and catering markets, and high volume hotel linen services. The Textile Rental segment principally consists of workwear garments, cabinet towels, linen and dust mats, are initially treated as inventories. It operates Textile Rental business under the brands, including Apparelmaster, Stalbridge, Bourne and London Linen. Its market workwear rental business, providing a clothing portfolio to the workplace, supported by sourcing supply and aftercare service solutions. Its Johnsons Stalbridge Linen Services offers the laundry service to the hospitality sectors. more »

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37 Comments on this Article show/hide all

Zipmanpeter 4th Jul 18 of 37

All the discussion on "repeat orders" yesterday/today on Sosandar (LON:SOS) begs the question: why do so few companies publish longer time series data on their key metrics as a simple Appendix in a simple table format​ with clear definitions at 6M ie reporting intervals.

This could include both financial data (Rev, GM, %GM) and other non-statutory measure (eg Ave Rev/user) that depends on the company. Some companies give do statutory financial data in 5yr summary form but few for their preferred KPI's.

It is especially frustrating where in principle such data is publically available if you go through the last 6 interim/final reports and manually compile. Since every FD and Marketing Director will demand this data internally, the cynical answer must be that they do not wish such 'naked' data to be available.

​Often, (as in current SOS case) any one set of simple y-on-y data is difficult to interpret for many reasons including differing interpretations of what the number even means. Definitions are rarely tight or clearly stated. Longer time periods start to iron out vagaries like weather, timing of marketing spend etc. In the case of SOS, they are still so new that such long term data is not available.

But how powerful a message would it be if they tell us that they will clearly disclose as the data builds.

So if SOS want us to focus on repeat orders they should define it and give it us for the last 4 periods and then update every time going forward ie 5 periods at next interims, 6 periods at next set of finals:

Clearly, investors would still need to interpret this but the base data and KPI trend would be clearly shared. Investors would likely reward such transparency and commitment to KPIs over time.

I hold £SOS​ and am going to mail this to them, telling them to look at this site/discussion to see how confused investors are about their RNS disclosure around repeat orders!

​FWIW, for SOS, as customer KPI's / definitions, I would like to see:

* No. active customers (definition: unique customers who have bought anything in last 12M rolling ​)

* No of repeat customers (definition: unique customers placing 2 or more orders in last 12M rolling ​)

​* Ave rev/order (definition: gross single order value before returns in last 12M rolling)

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Trident 4th Jul 19 of 37

Two issues to be aware of for public companies generally. Imagine an RNS to the market is a bit like going into the Headmaster's office to give an account of your yourself whilst he is wielding a cane:

Don't share up- front too much information that may contradict your core narrative
Tailor the message not to give the worst impression of yourself

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bestace 4th Jul 20 of 37

In reply to post #489606

And there's the agency problem in a nutshell. RNSs should be presented in a way that works best for the shareholders - you know, the people that actually own the business. They shouldn't be spun to present information in a way that puts the directors in the best light possible.

I think it's outrageous that there is a whole financial PR industry, effectively paid out of shareholders' funds, whose raison d'etre seems to be to spin and control newsflow to the  benefit of directors and to the detriment of shareholders' best interests.

No doubt there are plenty of people who will think I'm being naive here. Who knows, maybe they're right!

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rmillaree 4th Jul 21 of 37

Sosandar (LON:SOS)

My only real niggle with the news yesterday was the lack of confirmation that sales were still on track to meet the 9.3 million (i am ignoring a 0.2 mill discrepancy as being a non material shift). especially as the FD must have realised the implications of quoting the 23% increase when closer to 100% was probably expected ! - or perhaps the FD didn't perhaps?

If they had advised something along the line of although 23% increase is at the lower end of expectations we still anticipate that our sales targets for the year remain broadly unchanged albeit the weighting will be towards the later part of the year - there would have not been the question marks present that were present until the house broker has confirmed that the sales total estimates are reasonably intact.relying on brokers isnt ideal when most basic shareholders cant access the broker reports anyway.

I could be wrong but i am guessing the shareprice wouldnt have been as low today as it is f that point had been cleared up. I must say thats speculation on my part though and not something we can prove one way or another.

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Paul Scott 4th Jul 22 of 37

In reply to post #489391

Hi Robert Smith,

Really excellent report yesterday but you're really going beyond the call of duty to be finishing at midnight. Well done anyway.

You're very kind, thank you.

There was a 6-week period earlier this year where I had a nasty chest infection, and was pretty much bed-ridden throughout, so my SCVRs were very poor. So I'm pulling out all the stops now, to provide a better service!

Regards, Paul.

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RichardK 4th Jul 23 of 37

In reply to post #489421

Thank you Jonno (and subsequent commentators) for bringing MJ Gleeson (LON:GLE) to my attention. It ticked all my boxes so I bought this morning. The risk/return ratio seems better than the much discussed Sosandar (LON:SOS) !


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Paul Scott 4th Jul 24 of 37

In reply to post #489611

Hi bestace,

I take on board your points, and broadly agree with a lot of what you say.

I agree that it's annoying when PR firms have clearly polished a turd, in trying to present bad news as good news, etc.. It doesn't deceive anyone in the long run, so is counter-productive to do that. My view is that when bad news strikes, just get it all out in the open asap, take the hit, and then rebuild confidence once the problems are solved.

However, in my experience, financial PR firms (the good ones anyway) do perform useful functions;

  • As a financial writer, I've built up good relationships with PR firms, so through them I get ready access to company management (e.g. my 7:40am call with Sosandar on results day was arranged by their PR), broker notes, and often they give me useful briefings & introductions to companies I'm not aware of. They also read my SCVRs, and point out any factual errors or misunderstandings that occasionally occur, which is helpful. Or at the least, they will present the bull case, when i'm bearish on a company. So that gives me a more balanced view.
  • A lot of PR firms have grasped the importance of introducing private investors to small caps, so they encourage companies to get out there & come to investor shows, and arrange meetings with groups of investors, which is a useful function.
  • PR firms help companies explain their business model to investors, getting their message out there. Once investors better understand a company, they can better value it. Promoting the company should create a higher share price, giving us the option at least of selling into that at a profit, or less dilution when placings are done. That's quite helpful, as long as it doesn't go too far.
  • Even when I've written something negative about one of their clients, I rarely fall out with PRs. They realise that they can't pull the wool over my eyes, so they don't even try now LOL! Several times I've said to a friendly PR, "Sorry I was rude about your client xyz the other day", and they usually laugh and reply, "Don't worry, they deserved it!"
  • Making RNSs more comprehensible is another important role for PRs. Sometimes Directors produce absolute gibberish, and the PR has to (under time pressure) convert that into something more understandable.
  • The big risk with PRs is that try to please the client too much, by trying to conceal bad news, cherry-picking artificially good stats for the highlights, glossing over anything negative, etc. That's when they cross a line into deception, I'm afraid, and I think there's far too much of that going on.
  • Overall, good PR helps companies put their case across to investors. Bad PR is too promotional, and deceives investors. So obviously I'm very much in favour of good PR!

Regards, Paul.

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Lion Tamer 4th Jul 25 of 37

Hi Paul

1). I've been blown away by SCVR you (and Graham) have produced recently. Fantastic, thanks.

2). I've an awful image in my head of you on the beach whilst on holiday wearing socks with undercrackers and swimming shorts. Not a pretty image. Thanks for that :-)

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purpleski 4th Jul 26 of 37

In reply to post #489631

Thanks Paul and echo Robert Smith but don’t over do it now and give yourself another chest infection!!

On Sosandar (LON:SOS) I have a very small position bought at 29p (my smallest holding and less than 1.5% of folio before this fall and now .75%!!) but I do think that these type of internet “disrupters” is where the money will be made.  The high street is toast and if one finds the right investment (like Sosandar (LON:SOS) but not necessarily Sosander) a lot of money is still to be made going forward.  

I am happy that I didn’t go large on Sosandar (LON:SOS) but will be keeping an eye on it as if they have got it right medium term, then there is such a long way to go for the share price.  For me if it 10 bags I make a tidy sum and if it drops another 50% then I lose little.  A bit binary but I am happy with that.

Somebody tweeted yesterday that they had got out with a 50% loss and why oh why did he allow himself to get sucked in to this sort of stock.  He might be right but I expect investors said the same thing to themselves about Coke in 1919 and Amazon in the early 2000’s.  Both dropped 50% at least once in the early days.  Sosandar (LON:SOS) may not be another Amazon but.......

I look forward to the next trading update with interest.


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cholertonandrew 4th Jul 27 of 37

Thanks for some great reports this week Paul. I’ve thought a few times that we could do with you as a non-executive at Sosandar. I think you’d bring a lot of value to the table.

Best wishes,

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rhomboid1 4th Jul 28 of 37

I’d also like to thank Paul for a fantastic review of Sosandar (LON:SOS) delivered in the teeth of a gale as the shares reacted badly to the results...separating price action from valuation/investment decisions is the hardest aspect of investing imho

I want them to do’s not my kind of all...but I’m crossing my fingers & wishing all holders the v best

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R Khan 4th Jul 29 of 37

I can not understand why you do not make comment BUY SELL OR HOLD on particular stock
R Khan

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IGotPoesJacket 4th Jul 30 of 37

Personally, I think one should be a grown up and be responsible for their own buy/hold/sell decisions.

For me the SCVR has two functions. Cut through the jargon and balance sheet to give an informed view of any given stock, including situations that look like discrepancies. Second is to educate the reader to be better able to do this themselves.

Paul and Graham provide excellent analysis and good education. This isn’t a tips sheet and personally I don’t want it to be.

Keep up the good work chaps

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Howard Adams 4th Jul 31 of 37

In reply to post #489631

Hi Paul

My wife had the same, lasted nearly 8 weeks. Very nasty and debilitating. Sympathies.


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herbie47 4th Jul 32 of 37

In reply to post #489786

I don't think he is allowed to give advise by law.

It's best to learn for yourself anyway in my opinion rather than relying on others.

There are many tip sheets and mags that do that sort of thing.

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jonno 4th Jul 33 of 37

In reply to post #489651

Thanks Richard. I hold MJ Gleeson (LON:GLE) and am looking for an opportunity to add. Hopefully the company will continue to do well for investors. I would also endorse Gromley's comments on positive corporate governance in that it appears that the Board was not prepared to accede to the demands of the former CEO for what it considered excessive remuneration.

All the best

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millen 4th Jul 34 of 37

In reply to post #489726

Thanks Purpleski. That makes me feel better as I can Trump that by saying Sosandar (LON:SOS) is 0.3% of my non-funds public market portfolio! But falls like this still hurt psychologically. Anyway, for me it's been a Paul/ Damascus wake-up call after so many recent small-scale disappointments eg SOM, G4M, BKS. Although I did nicely over the years from a few strong winners like BOO, AVS, REV, PAYS and especially DTG, I feel I just don't have the sell-discipline to fish in the highly volatile potential blue-sky, but probable sucker-stock, pond anymore. I think a few can do well out of these but this requires really disciplined entry points and a good feel for when stocks are over-hyped and over-priced. Katie Potts' comments a few months ago on why her tech-trust avoided IQE ring true. For the future I'll focus on mid-caps and beyond and the far lower volatility of collective vehicles.

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xcity 4th Jul 35 of 37

I got into Boohoo (LON:BOO) at close to the bottom, and I've been trying to persuade myself that Sosandar (LON:SOS) might be a similar opportunity. But Boohoo (LON:BOO) was already quite big and profitable and generating all the cash it needed to expand. And Boohoo (LON:BOO) wasn't really dependent on fashion (they start so many lines that they must have winners and that's where they get most of their sales) - it's about speed, price, quality and, most of all, about the marketing to their target audience.

afaics, Sosandar (LON:SOS) need to get their fashion/product right so every sales season there is the chance they'll get it wrong. They're growing fast but still burning cash (I'd be surprised if they avoid another cash raise). I'm willing to trust the management on the fashion and product, but do they have the expertise to run the business and make money? I don't know. It's not easy to achieve their growth rates, but harder still to achieve them with positive cash flow.

Price is down to 14.5p - cheap compared to where it was, but if the rest of this year (ie autumn/winter) isn't great they will be needing to raise more capital at a time of disappointing growth and presumably an even lower share price.

I'm really not doing a good job at persuading myself.

And when Boohoo (LON:BOO) had their disappointing results, they described them as disappointing. I felt I knew where I was with them.

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SundayTrader 5th Jul 36 of 37

Hi Paul

I thought I would comment on Gresham Technologies (LON:GHT), as I know a very little about it.

Historically it has been on a high rating based on expectations for the Clareti software, which is sold to a very niche market - viz. large banks to help them manage interbank money movement over Swift more effectively. There is no competition to speak of. Today's update emphasises the product's continued success.

The Research Tree profit forecast looks too low to me. 2018 was a duff year, mostly because two large contracts were not signed until after the year end. So the 2019 update should be taken with an appropriate pinch of salt.

If they hit their 2019 target of 24m plus revenue, which they are on course for, then sales will be up 20% on 2017, for which they reported adjusted ebitda of 5.1m, and reported net profit of 3.8m. Naively, I would have thought management expectations should be a return to at least somewhere around those levels, say net profit of 4 million. Very roughly, that gives a possible current year PER of 20 or so. Still high, but appropriate on profit growth expectations of around 15% annually, and the strong moat around their niche market.

I would have thought the Research Tree analyst ought to know more about it than I do, but I cannot see that a current year PBT of around 1 million is compatible with the recent market movements. Possibly yet again a commentary on how difficult it is for private investors to understand what "management expectations" actually are.

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John McArthur 5th Jul 37 of 37

In reply to post #489656

Hi Paul,

Hope this finds you well.

By the way, when it comes to the subject of RNS one point I would like to make (which I'm sure you will have covered in the past) is that investors should be aware of what is 'regulatory', what is not, and why this is important.

A formal RNS is meant to be 'regulatory' in nature i.e. something that is required under LSE/AIM rules to be disclosed to the market. In most cases this will be potentially price sensitive information i.e. a Director leaving or being appointed, a profit warning, a significant contract win that creates an upgrade, etc.

Everything else (i.e. news that does not change the current trading outlook) is non-regulatory and should be issued under 'RNS Reach'. To my knowledge the introduction of Reach was deliberately designed to create a level playing for 'regulatory' news whilst still allowing companies to communicate to investors with other marketing fluff.

The reason I mention this is that far too many companies badly abuse this system and issue all of their updates via RNS. The obvious problem this creates is that investors read about some product launch or contract win and assume that because it has been announced to the market it must be a trigger point to buy stock. I'm sure you will have seen this for yourself on many occasions and it typically happens when a company's share price is flagging or quite often right before a fund raise. In my experience it is also usually the pre-profit hyped up companies that abuse this the most.

As a rule of thumb, if a company issues an update (RNS or RNS Reach) and doesn't give specific reference to what this has done to their numbers then investors should largely ignore it or - preferably - ask the company in question what the point of the news is. This is especially the case with 'contract wins' or 'trading updates' that don't provide financial metrics as this is one area that gets particularly abused.

Hope that's semi useful!


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About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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