Small Cap Value Report (Thu 7 Feb 2019) - FDEV, IRV, ACSO, DPP, SDRY, GATC, OTB | Paul Scott

7th Feb '19 by Paul Scott

39 comments 13046 reads

Good afternoon, it's Paul here. I'm running late today, apologies. This article should be complete by tea time. See the header for the companies I'll be reviewing.

To start with, here are some comments on a company which reported interim results yesterday.

Frontier Developments (LON:FDEV)

Share price: 1000p (up 12.4% yesterday, at market close)
No. shares: 38.7m
Market cap: £387m

Interim results

Frontier Developments plc (AIM: FDEV, "Frontier", the "Company"), a leading developer and publisher of video games based in Cambridge, UK has published its interim results for the 6 months to 30 November 2018.

Clearly the market likes this announcement, as the share price has risen 12%.

I don't know where to start with this company, so am really just flagging what seem to be a fantastic set of results, and then readers can research more if it looks of interest to you.

Revenue growth of 240% - wow!

Revenue increased by 240% to £64.7 million for H1 FY19 (the 6 months ended 30 November 2018) compared to £19.0 million for H1 FY18. The significant growth reflects the success of Jurassic World Evolution together with the ongoing performance of Elite Dangerous and Planet Coaster, in line with the Company's strategy.

From what I can gather, games have a short burst of high sales after launch, but the best games become "franchises" - with repeated releases of updated versions, giving multiple bites of the same cake.

Operating profit has gone through the roof;

Operating profit of £17.2 million at a margin of 27% (H1 FY18: £3.0 million, 16%), with the growth in the percentage margin reflecting the substantial growth in revenue, albeit at lower gross profit margins.

Current Trading and Outlook

All three game franchises continue to perform well, following good trading performance during the competitive Holiday period incorporating Black Friday and Christmas price promotions. The Board is comfortable with analysts' revenue projections of £79 million to £88 million for the current financial year (FY19, the year ending 31 May 2019).

Frontier's strategy of continuing to grow its portfolio whilst supporting existing game franchises is delivering well. The development of Frontier's fourth game franchise, based on the Company's own un-announced IP, is on track, with release planned for later in calendar year 2019.

Balance sheet - no issues here, it…

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InvestedGeordie

6th Feb '19

Good Evening Paul,

There isn't a huge amount I can add, here, to your excellent Frontier Developments (LON:FDEV) summary. I can draw readers to look at management share holdings. David Braben CEO +30% holding, David Gammon (Chairman) £50k buy above these levels and of course, David Mitchell (Tencent NED) spending over £1M and now significantly underwater.

I can't say I have any other holdings in companies with better shareholder alignment.

People will worry about the next franchise. My advice, let Management worry about it. If you are concerned look at their track record. Speculation is dangerous, and in my experience, counterproductive. Think about the quality of content they have produced for Universal. Are they likely to continue a relationship? I'd expect so, in due course.

I'd encourage viewing content from Mello, filmed by the brilliant Tamzin & Tim: https://youtu.be/KT0O-xoBvs0

Alex Bevis is very approachable, and responsive. I was kindly invited to lunch by him & Finncap in central London tomorrow, but I have to attend a funeral on Friday in Lancashire, and so can't make both.

I'm happy to try to answer any questions

Thanks,

LeoInvestorUK

7th Feb '19

DP Poland (LON:DPP) - Raising £5.3 through a placing at a near 60% discount which will make up near 40% of the enlarged share capital. CEO steps down.

While they have looked like a crock for a while, it wasn't previously clear that an emergency fund raising of this nature was required. I'd be very cross if I held.

Edit: Just checked the terms of the "Broker Option". Unlike an Open Offer which is sometimes attached to placings and which (despite the name) is only open to existing shareholders, this Broker Option is open to both existing shareholders and others. Therefore it is just like a further placing but with a wider audience. So the new shares are likely to be just over 40% of the enlarged share capital.

MrContrarian

My morning smallcap tweet: DPP=desperate placing price

DP Poland (LON:DPP), Tax Systems (LON:TAX), Randall & Quilter Investment Holdings (LON:RQIH), Kromek (LON:KMK), Allied Minds (LON:ALM)

DP Poland (DPP) £5.3m placing and 0.5m 'broker option' at 6p, a desperate 58% discount. A 2.7x dilution. Cash to maintain medium-term store roll-out and keep the lights on. CEO goes end June. He is thanked. Maybe he'll get free garlic wedges.
Tax Systems (TAX) possible cash offer at 110p, a 10% premium. It rose 6p yesterday.
Randall & Quilter (RQIH) £100m placing and token £7m open offer at 153p, 15% discount. Share count expands by 52%. WIll be used for acquisitions.
Kromek Group (KMK) £20m placing and token £1m open offer at 25p, a 9% discount. Cash needed for expansion.
Allied Minds (ALM) Gravy train switches to narrow guage. CEO agrees to "materially reduce her cash salary for 24 months, commencing with calendar year 2019, and to defer payment of the balance of her salary into 2021. Any earned bonus for 2019 and 2020 will be satisfied in shares rather than cash." Target annualised HQ cash operating expenses will be reduced by $5.6 million, or more than 40%.

accesso Technology (LON:ACSO) - "broadly in line...before taking account...exceptional...$1.7m". Am I right to understand then that's a profits warning of around 10% [1]? That would follow on from a 4% forecast cut in October and would confirm the downward trend. They also seem to have laid the path for some write-downs and reduced outlook when they next update us.

[1] $19.8 net profit forecast -2% -$1.7m = $17.8

Frontier Developments (LON:FDEV) - I had a look at some games reviews late yesterday. The impression I got was that Jurassic World: Evolution has limited depth and may tail off relatively quickly compared to previous titles. On the other hand, Elite: Dangerous may have significant further potential with ongoing investment - it may even be possible to move to a monthly subscription model. Caveat: I'm not a gamer.

danielbird193

B.P. Marsh & Partners (LON:BPM) trading update today reports steady progress across its investee companies. Reported NAV is 333p compared to last night's closing price of 281p, so a nice 16% discount providing some margin of safety. I don't think this one will blow the lights out but certainly worth a look at the current price. (I am a holder).

mammyoko

Hi Paul would be grateful for your view on the TU from accesso Technology (LON:ACSO). In light of the accounting issues at Patisserie Holdings (LON:CAKE) and at Staffline (LON:STAF) does the statement "will also set out a number of new enhanced disclosures relating to the Group's operational and financial performance" go part of the way towards explaining today's fall or is it the movement of Tom Burnet to a NED role?

Carcosa

accesso Technology (LON:ACSO) Accesso, once a bulletin board favorite (i.e. all revenue & no meaningful profits) share price sinks to early 2016 levels (also 28% down today). $1.7m charge, reviewing investment priorities, Tom Burnet now non-exec.,only a 'broadly inline' trading update (if you ignore the 1.7m) and "will also set out a number of new enhanced disclosures relating to the Group's operational and financial performance." aka making up new KPI's according to RNS trading update.

So Board may have recognised they need to make real money now(?). I wonder if they may become a target for an acquirer this year?

Gostevie

Good morning Paul,

I'd be interested in any thoughts you or other readers might have on today's 'broadly in line' (yes, that phrase again!) Trading Update from accesso Technology (LON:ACSO).

The shares are down about 25% as I write this at 8:45am so I am wondering if it could be a buying opportunity. On the other hand I'm a bit concerned by the remark that the Full Year Results announcement on 27th of March "will also set out a number of new enhanced disclosures relating to the Group's operational and financial performance."

Also, long-serving Executive Chairman and leading light Tom Burnet is moving to a NED role, and they have appointed a new 67 year old US based Non Executive Chairman who currently has four other current directorships.

Stock Ranks rates the company as a 'Falling Star' and on balance I'm inclined to agree and not buy any at least until the results announcement but would welcome alternative views.

mmarkkj777

accesso Technology (LON:ACSO) are now down 32.5%.

The fall could be overdone, but I don't like this stock (well, more the product/service).

Could be an interesting short-term trade, when it finally hits the bottom.

Re accesso Technology (LON:ACSO) the statement about 'enhanced disclosures' relating to financial performance could be as innocuous as setting out some new KPIs. If that is all it is then why bother flagging it now as it has the potential to create investor uncertainty.

The balance sheet here is very weak - negative NTAV of £18m at the half year.

Plus there is the added uncertainty of the role that Tom Burnet will play in the future as he has been responsible for the growth of the company

brucepackard

Thanks for the DP Poland (LON:DPP) - incredible. It's been going almost 10 years, never made a profit. And now "targeting positive EBITDA in 2022 and targeting to be cash flow neutral in 2022." IE they don't think they make a profit before 2022. And over the last decade how much money have management been paid (in cash & shares) while shareholders continued to fund their losses with placings.

How hard can it be to sell pizza's in Poland? This is not some blue sky technology stock. Understandable that first few years would be loss making, but by now the early stores should be throwing off cash. I don't hold. Near miss, glad I avoided. Thank you stocko stock ranks!

jonno

B.P. Marsh & Partners (LON:BPM) steady as she goes, as danielbird193 observes it is not going to shoot the lights out, but the company's expertise in the field of insurance creates a significant moat, in my view. The spice is currently added by what appears to be the pending flotation of LEBC in which B.P. Marsh & Partners (LON:BPM) holds nearly a 60% share, which should, assuming it happens add momentum to the share price, similar to the flotation of Hyperion some 3 or 4 years ago.

Mr Marsh the founder is quite elderly so my best guess at an end game is that the company will eventually be acquired by agreement, by PSC Insurance Group, the Australian entity that recently acquired 19.6% of B.P. Marsh & Partners (LON:BPM) as an investment.

Also an interesting announcement from Strix (LON:KETL) this morning regarding the the proposed acquisition of certain assets of HaloSource Corp, that specialises in water filtration technology. The latter was suspended on AIM in December due to lack of funds. According to Zeus Capital the acquisition if it happens should be a good fit with Strix (LON:KETL) Aqua Optima brand.

All the best

accesso Technology (LON:ACSO) - I have just looked at this again having got a price alert (buy price below £10).

I don't think the profits miss explains a 1/3rd fall today, or a 2/3rds fall from September. Rather I think this is a combination of:

the Board has recently initiated a review of the Group's investment priorities in the context of the significant future opportunities available to it and the current areas of business momentum.

and

set out a number of new enhanced disclosures relating to the Group's operational and financial performance.

Executive Chairman, Tom Burnet, will move to a Non-Executive Director

A possible inference is that the board have concerns over the basis by which EPS has been reported until now - certainly it seems (on the face of it) out of line with cashflow. Maybe Andy Malpass, the relatively new audit committee chair and a group finance director in his previous company reported concerns. It is even possible that recent financial scandals have led boards to take a more conservative view.

It could also mean that they are seeing a change in the market place which might result in write downs as well as opportunities.

I think it would be unwise to value this company on a P/E ratio (or PEG) until this is resolved. Alternative value measures are: price to free cashflow (FY2018 46x at 950p) and tangible book value (negative). Stockopedia's overall quality score is good, but individual figures are nothing special and of course may be open to interpretation.

I previously made money buying in 2017 at much higher prices and selling in 2018, but I am not tempted to repeat.

seadoc

Bruce, DP Poland (LON:DPP) is a software company that happens to make Pizza. Domino's Pizza (LON:DOM) has made the model work very well in UK and going back ?three years they announced an increase in staff numbers, of whom about half were for the IT Dept. They can make a pizza for a couple of pounds and sell it on an app on your phone for £15. The margins are good. Clearly the model is not as successful in Poland. It's not that the Poles I know do not like pizza. Perhaps many of the staff that have slaved in Domino's Pizza (LON:DOM) UK stores have gone home and opened independent stores in Poland selling the same pizza for £5? This used to be my largest holding, Sold half at around 35p so the damage is limited.

As you point out Stocko called this one right.

Rusty2

Did Stocko call it right? I looked at the June 9, 2018 page: http://reports.stockopedia.co.uk/1082842/Domino_s_Pizza_LSE_1082842_20180414.pdf

It had a SR of 82 which is fairly high. I was never convinced they would do well in Poland, I think too much cheaper competition, price does matter in some countries. I can't believe people here pay over £15 for a take-away pizza. I have always thought pizzas were expensive but that seems crazy to me.

hayashi22

Frontier Developments (LON:FDEV);certainly looks like a company on a tear. I'm sure my daughter would have more of a view than me. Would though flag up the auditors-GT. Ooh er...........

Zipmanpeter

Superdry (LON:SDRY) trading update today still blames weather (not cold enough) & poor product offer for weak Q3 results. Overall Q3 sales were £269Mn (-1.5% Y-on-Y Q3; £684Mn (+1.3% YTD).

By channel (no geographic split offered)
• Q3 LFL store (47% total) is roughly -11% LFL (being down -8.4% with selling area up +2.6%)
• Q3 E commerce (26% total) disappointed at -1.5% Y-on-Y (ie less bad than stores = channel switching)
• W/S +12.7% (27%) but only OK – as driven by new distribution reach as well as “good forward orders”

IMO - Key Mgt diagnosis that core product (jackets, hoodies) has been weak looks right - and thus will not improve until Q4 and beyond when new season stock comes in and sells through.

This is especially true since the new Chief Product Officer Daniel Brigetmeyer recruited only in Q3 has bounced and gone to C&A in Europe already. (Why is not stated and Mgt politics is a concern with founder/still major shareholder Dunkerton is outside and fermenting trouble – easy for Mgt to get distracted. Personally, I think he needs to stay out but open question if current Mgt is good enough if they allowed weak product & low innovation to occur on their watch).

However, replacements eg Phil Dickinson as Creative Director already found and his experience at Nike in Sport is interesting. I think Superdry has a good opportunity in Athleisure/Sport related products - an on-trend and natural evolution of its historic brand strength in hoodies, jackets and T shirts that is less weather dependent.

Stores now <50% of revenue and falling, with around 60% reaching end of lease/break in next 4 years. Likely to fall further sharply as some stores will likely close/be impaired in March store review but retained stores will likely enjoy big rent reductions going forward if they renew.

Strong balance sheet will withstand what I expect to be some major impairment and inventory write down costs. Could easily be £30-50Mn write down in my view despite short leases. Superdry may also have had to give away a lot of margin to clear stock with low appeal so 1 more very bad profit update to come. Margins noticeably not mentioned in today’s update!

However, net, I am an optimist on Retail in the medium term and think the sector is generally undervalued; its only route to market (ie online up, stores down) that is really changing. I continue to think Superdry a strong brand with global potential which can recover its footing as soon as its product better eg US mentioned as a positive and China grew strongly. Product transformation plan well underway and can work.

I think Superdry will prove a good buy on a 2-3 yr basis but I will wait for full year results in March to consider buying. I have too much high risk UK Retail in my portfolio already (come on FCCN!) and Europe is not encouraging short term.

Camtab

Given the following one has to ask "so what confidence can investors take from an audit by Grant Thornton", n.b. Patisserie Valerie.
Grant Thornton’s new chief exec has told MPs that current audit procedures are not structured to spot fraud, merely to say whether company accounts are “reasonable”.
David Dunckley’s questioning saw the BEIS committee’s future of audit enquiry finally sputter into life after a fairly innocuous opening. The new GT chief, who replaced Sacha Romanovitch in murky circumstances, clashed with MPs over the role of audit.
“We are not doing what the market thinks,” Dunckley told the committee. “We are not looking for fraud and we are not looking at the future and we are not giving a statement that the accounts are correct. We are saying they are reasonable, we are looking at the past, and we are not set up to look for fraud.”
Dunckley also admitted to an “expectation gap” between what the public expect from auditors and what they do in practice.

Small Cap Value Report (Thu 7 Feb 2019) - FDEV, IRV, ACSO, DPP, SDRY, GATC, OTB

Frontier Developments (LON:FDEV)

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Paul Scott

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