Small Cap Value Report (Thu 6 Sep 2018) - MCB, BOTB, FDEV

6th Sep '18 by Paul Scott

27 comments 10041 reads

Good morning!

It's a very quiet day for interesting news today. For newcomers who may not be aware, we normally only cover interesting trading updates & results announcements in these reports.

In response to reader requests, I'll also circle back to yesterday's announcement from Frontier Developments (LON:FDEV) . Searching the archive, I see that Graham has written about it 3 times in the last year. I last looked at it in Sep 2017, and it didn't float my boat then, on valuation grounds mainly. So, once I've got up to speed by reading that lot, and read the accounts, I'll post my latest thoughts here.

Firstly, let's have a quick look at today's trading updates & results in the small caps space.

McBride (LON:MCB)

Share price: 132.5p (up 1.6% today, at 14:30)
No. shares: 182.6m
Market cap: £241.9m

Final results

McBride plc, the leading European manufacturer and supplier of Co-manufactured and Private Label products for the Household and Personal Care market, announces its results for the year ended 30 June 2018.

This is another share which has wilted over the spring/summer this year.

Recap - which I might as well type up, as I'm doing the work anyway);

7 Sep 2017: (191p) My review of results y/e 30 Jun 2017. In line results. I disliked: debt & pension-deficit on balance sheet, and H2-weighting comments in outlook section for the new year. It looked decent value though, and had a high StockRank of 95. Seemed a very good turnaround in performance (and share price).

24 Oct 2017 (213p) - I reviewed another trading update, confirming in line with expectations, but again mentioning H2-weighting expected for FY 06/2018. I concluded that it was probably not a bargain, on PER of 14.

We didn't report on it here at the SCVR after that for a while, probably because the company just doesn't interest Graham nor myself. It's desperately dull having to write about companies that you can never see yourself owning. The share price turned south from 8 Jan 2018, falling from a peak of 230p in Dec 2017 to a low of 121p in May 2018.

The chart suggests that the rot set in from 8 Jan 2018, with…

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johnsmith68

6th Sep '18

Hi Paul. Welcome back and thanks for all the great analysis already. I too would be very grateful if you were able to take a look back over Frontier Developments (LON:FDEV). I see this as a potentially great long term investment but I'm trying to understand if the SP drop yesterday is a great entry opportunity or simply the market getting realistic about the next few years of potentially reduced margins and operating profit as a result of increased development and marketing spend on the upcoming franchises.

Brookeda

As always thanks Carcosa for your in depth and valuable contribution.
I am a long time holder of AVAP and added more earlier this week as it's long term prospects continue to look good.

Paul Scott

Hi Wildshot,

OK, there seems to be reader interest in Frontier Developments (LON:FDEV) so I'll circle back to it today, as very little interesting results/trading updates were put out this morning.

Regards, Paul.

wildshot

Many thanks Paul.

DJCP

Another 'Thanks Paul' :o)

I'll be interested to read your analysis, and see if your views have changed (for better or worse) as you've covered Frontier Developments (LON:FDEV) before.

I doubled up yesterday morning, then put a limit buy-order in when the SP continued to drift down, expecting it to expire at market close, but instead it continued for today and got dealt this morning. So I've now 3x my initial July purchase. Doh !

Nick Plantman

I have to say having held BOTB shares for at least 4 years I too am frustrated at the liquidity of the shares and although the dividends and special dividends have been good in the past they seemed to have dwindled and better value and liquidity is available else where. I guess this may be due to the ongoing VAT and gambling tax court case. My biggest fear with this company is now that they are a very well established company and have lots of customers who are now nearly solely online as they have been able to dispense with physical sites, the next money saving step may be to take the company private as most of the shares belong to the directors some 74.35% they could just buy back the rest of the company at current prices for about £6.6million pounds, with that in mind I off loaded 30% of my holding last month after the special dividend was paid.

dgold

Yes I agree which is why I sold mine some time ago.

Paul, aren't you worried that if the directors thought they could sell the business for a good price to a gambling company they would first delist and buy back the last 25% before doing so?

rmillaree

£ FDEV

This one seems very interesting, one has to say its a risky business having to continually churn out titles on a regular basis and hope they will deliver. I kind of liked where FDEV were going in that everyone seemed to think it was one new title per year with ongoing income from previous titles etc etc. They seem to have proved they could go up a gear with the latest release.

However as ever the market hates uncertainty and a delay in what was previously planned for so soon into this new plan of attack doesn't help. If it was known this was bond title and release had slipped to match film release (or similar with say Toy story / other known film etc) then that would be neither here no there. The absence of news is not a great sign in this regard as a neutral bod looking in. In some respects delay could keep original schedules going with next one coming along as same time as originally planned so no overall impact other than cashflow etc.

Ok if they have now reverted to "finding" a soon to be released own IP title they didn't previously consider releasing that may work but it deffo sounds more of a plan d type move than plan A.

As a non holder this may be good news as there is short term uncertainty at the same time headline figures aren't great, causing subdued shareprice - great if you want to buy. The financials should show much improved comparatives over the next 6-12 moths so that should help the market perception soon - however thats probably no good if there isnt reasonably good probabability their own IP biggie will delver something decent income wise in the expected timescales.

In summary i can see why the stock is currently rerating from nice growth dependable cash cow deserving premium rating to something with reasonable promise of such but much to prove with possible wobbles on the way - say 12-15 * average expected pe over next 3 years - although i would always be wary about over reliance on projected future growth in earnings over 18 month timeframe unless there is obvious reasons why - eg if they could expand to two big releases per year rather than one.

I would be interested to know what the prospects are for next 3 years if they dont have a biggie in one year - the known for me is what is the bare minimum "tickover" profit can they expect

Zipmanpeter

Re Best Of The Best (LON:BOTB) my worry is different. I think the owners have created a very comfortable lifestyle business for themselves with a good income (especially salary plus controllable divis) and a pleasant working environment - looks fun to run!! I think (fear) they will simply bumble along in a low risk, low key kind of way.

If they sell, then this 'purpose' disappears. Even if they can life on a beach resort for ever this is a bit dull once you have run a business. So only if they get a shockingly large offer they feel they have to accept will they act - nice thought but in my view unlikely.

Risk then is complacency. How big is the moat if a big gambling company or a more drive entrepreneur set up from scratch a rival competitor and spent the money on organic growth vs buyout? Then suddenly a lot of value could be lost. As an ex FMCG marketeer, I am not convinced by the marketing savvy of the company - it has dabbled in a lot of media and is still a bit clunky.

Net, I have held BOTB for several years now as I can see the business potential but I am not sure management's interests are aligned with mine.

Not everything is about maximising profit for SME business owners.

Paul,

Just to expand a little on your Frontier Developments (LON:FDEV) comment:
"They're called franchises because a series of new versions are subsequently released, hence games companies can generate multi-year profits from constantly putting out newer versions of popular games."

Rather than new versions of existing games, FDEV provide DLC (DownLoadable Content) and PDLC (Paid DownLoadable Content). Basically bug-fixes/minor additions for the DLCs and larger upgrades/additions for the PDLCs. They still sell the original game as a stand-alone, but as these PDLCs become available they'll also do a bundle (Deluxe Edition) for gamers to buy both.

Although not a gamer, I'm impressed by their ongoing (social media/forum) rapport with their customers, AND taking onboard their comments/requests. One example being dinosaur sizes on the Jurassic World Evolution (JWE) franchise. Gamers had complained that if they 'created' a PaulyScottySaurus, it would be full size as soon as hatched/born, so they've now upgraded this so the gamer can see it grow to adulthood. The request(s), if viable, can be added to the next PDLC, thereby pleasing the customer(s), who can proudly say "Frontier have created the winged dinosaur range I suggested" etc.

Although now 4 years old, they made this comment in the finals:
"It is worth noting that Elite Dangerous achieved its highest annual revenues to date in FY18 following a successful launch on PlayStation 4 in June 2017."

Yesterday's drop seemed to be partially due to the confusion over if the franchise that should be been their 4th (a licenced franchise), has been delayed or cancelled. An investor who seems quite knowledgeable on FDEV has asked them to clarify this.

ricky65

"There are a lot of punters following momentum-based strategies, and using stop-losses right now."

I have doubts about this. My feeling is that most individual investors don't use stop losses. Has there been a survey?

ISAallowance

Late 3pm trading statement from EI (LON:EIG), a very heavily leveraged pubs group at a significant discount to tangible book value. Positive like for likes over the summer, probably unsurprisingly due to the world cup and good weather. Market seems to like the statement - up a few percent following the release. Stocko computers like the stock - SR 97 at present. I hold.

EI (LON:EIG) also mentioned that they are exploring ways to get benefit from the freeholding property which may include selling some or all of the properties.
I think this is the reason for the jump, this is one I have held for several years now in the hope someone will come in with an offer or the NTAV will be realized through a sale

Trident

Paul. An interesting article in The Times T2 section by a girl who went to Eton some years back, commenting on a certain swathe of Etonians, who had unerring self-belief and entitlement, a distant sense of what life was like for what the less fortunate, and scathing put down culture for non u types. As she says the ready smirk of BJ arguably betrays his membership of this particular clique. George Osborne also a strong candidate. Also BJ is manifestly useless, but can only hear the clarion call for PM from his arguably deluded promotors.

Sorry for the politics, but if I hear one more call for Boris for PM, I think I may explode!

peterthegreat

Thanks to Paul for covering Frontier Developments (LON:FDEV). I would agree that the historic numbers may not be of great relevance but it is worth confirming that the company's track record does show that it has the capability to develop multiple games franchises. Before I bought the shares I also checked management's record and senior management does seem to have plenty of experience and a decent record and the CEO still retains a huge stake in the company. I think the investment from Tencent also helps to validate the competence of the company as well as helping facilitate access to overseas markets. With so few major products, this company is likely to produce a bumpy ride for investors, but providing the next couple of games developed are reasonably successful, then I think the rewards are likely to be substantial.

Paul. Many thanks from me too, for covering Frontier Developments (LON:FDEV)

Been quite a bumpy ride these past two days, to say the least !
The closing SP this week so far (Mon-Thu) has been 1175p, 1060p, 888p and 1010p

More by luck than anything else, my <850p purchase this morning has done ok, and now just about in profit overall.

I'm now hoping we'll have some news before the interims are released early next year - more JWE franchise figures, Tencent distribution, further details on new franchise etc - else this could just drift along (or down).

Hi Trident,

We don't do politics here, this is about small caps.

Let's keep the politics rants on Twitter!

7th Sep '18

Yes, wrong place, I know for politics! Will stick to howling at the mooooon!

TMFMayn

(thank goodness we have RT, as without it, post the disastrous MiFID II, we would be almost completely in the dark). I hope people are writing to your MPs, to express your disgust at MiFID II shutting down PI access to a lot of research.

Well, if broker research was always accurate and useful, there would never be any profit warnings as profits would always be 'in line with expectations'.

I reckon a lack of broker research is probably better for PIs -- encourages more independent thinking/research, thus developing your own investing skills, and provides more pricing anomalies.

Just a personal view though.

Small Cap Value Report (Thu 6 Sep 2018) - MCB, BOTB, FDEV

McBride (LON:MCB)

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Paul Scott

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