Small Cap Value Report (Thu 8 Feb 2018) - OTB, RBG, ESCH, SEE, DSG, DFS, CRL

Thursday, Feb 08 2018 by

Hi, it's Paul here.

I'm not convinced that the recent US market volatility is over yet. So personally I'm braced for potentially another lurch down at some point.

To get you started today, I've added a new section on the profit warning issued by Gattaca (LON:GATC) to yesterday's article, here.

Fresh forecasts for GATC have just come through this morning, from commissioned research company, Equity Development. The beauty of commissioned research is that it's freely available online to investors - very important now that MiFID has bug***ed up my access to other research notes. As with all broker notes, I ignore the recommendation and price targets. However, it's very helpful to get the best guess from a capable analyst. I've updated yesterday's report to include the revised forecasts. Given its poor track record of repeatedly missing forecasts, I think it's wise to factor in an additional level of caution with the latest forecasts.

On to today's news;

OnTheBeach - just a quick mention in passing, as it's now too big to cover here (market cap of c.£654m). There's an in line with expectations update today from the company, which reads very well. This online travel company (mainly UK) is remarkably profitable, and growing nicely. International expansion is underway, albeit at an early stage. I'm kicking myself for selling this one far too early, and think it might even be worth revisiting at the current, higher price. The valuation is far from aggressive, considering it's turning out to be very successful. They're clearly doing something right. I should own this one, but don't.

Revolution Bars (LON:RBG)

Share price: 162.5p (unchanged today)
No. shares: 50.0m
Market cap: £81.3m

(I hold a long position in this share)

A new CEO has been appointed, Rob Pitcher - a very appropriate name for a bars operator. The RNS today gives a few details of his track record, which is 25 years in the hospitality sector. I'm very pleased the company has appointed someone with lots of industry expertise, and not a financial engineer. I just hope they don't offer him a ridiculously generous "incentives" package. Such arrangements seem totally discredited in my eyes, particularly after the obscene payouts for Persimmon (LON:PSN) management, who just happened to…

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On the Beach Group plc is a United Kingdom-based online travel agent. The Company operates in two segments: Core and International. The Company's core segment conducts its activity through the United Kingdom Website (UK). The Company's international segment conducts its activity through Swedish Website ( The Company is an online retailer of beach short-haul beach holidays, primarily targeting customers in the United Kingdom under the On the Beach brand. The Company's technology platform enables customers to package the constituent components of their holiday (including flights, hotels and transfers) to build custom-made holidays from a range of flight and hotel combinations. The Company offers customers a range of flight and hotel products bookable through online channels (including by desktop, mobiles, tablets and applications) and over the phone. The Company's subsidiaries include On the Beach Beds Limited and On the Beach Travel Limited. more »

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Revolution Bars Group plc is a United Kingdom-based operator of bars. The Company has a trading portfolio of approximately 60 bars located predominantly in town or city high streets, which operate under the Revolution and Revolucion de Cuba brands. The Company's bars focus on a drinks and food-led offering, and typically trade from late morning, during the day and into late evening. Revolucion de Cuba bars are characterized by their 1940s Cuban-inspired style, with dark woods, traditional bar counters, antique tiles, vintage furniture, Havana-style ceiling fans, and original Cuban artwork and photographs. Its bars are located in various places, such as Cambridge, Ipswich and Norwich in South East; Bath, Plymouth and Southampton in South West; Birmingham, Derby, Leicester, Loughborough and Milton Keynes in Midlands; Cardiff and Swansea in Wales; Blackpool, Chester and Huddersfield in North West; Sheffield, Sunderland and York in North East, and Edinburgh and Glasgow in Scotland. more »

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Escher Group Holdings plc, through its subsidiaries, is a provider of distributed messaging, and data management solutions and services. The Company develops, markets, sells and supports enterprise-wide software applications for post office counter automation and distributed network communication. The Company's segments include Software development and consulting services, Software licenses, Maintenance and Support. The Company provides on-premise or cloud-provided digital communications and transaction management solutions for organizations working within various transaction management environments. The Company offers Riposte, which is a messaging software. The Company's solutions include digital point of service, including postal automation, banking automation and retail automation; e-government, including document management and digital growth hubs; consumer engagement, including eMoney and Identity, and logistics, including Track & Trace, and Click & Collect. more »

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53 Comments on this Article show/hide all

mammyoko 8th Feb '18 34 of 53

I am in agreement with Paul. I think sentiment has changed here. Sentiment has been driving the market higher not fundamentals. Few people on the street are advising to buy the dip this time round. This could lurch lower again very soon

The four key things to look out for are

1. This for the pin that pricks the bubble - ten year treasury yield

2. This for the bubble bursting

3. This for the scale and velocity of the fall (and for the potential repercussions)

4. This for the driver of inflation that will cause the pin in 1. above

I just moved all my DC pension money into money market funds. Could be wrong but think the risk reward of another 10% upside this year vs potential 30% downside is moving towards the latter.

UK small caps won't be spared.

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mammyoko 8th Feb '18 35 of 53

In reply to post #312608

Connect (LON:CNCT) - completely agree that's how it will pan out

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threeputt 8th Feb '18 36 of 53

In reply to post #312538

I have used etf shorting day trades regularly this past 6 months while the market has been at or near highs, I aim to get a feel of how the ftse100 is coping with trying to beat the days high and if I feel it's struggling I may slap on an SUK2 short with the intention of closing it out if I get it wrong and taking some gains if I get it right, all in all it's been rewarding and adds up. I also did a MIDD long on the ftse 250 on the santa rally too that came up trumps nicely.
These etfs can be dangerous to hold for too long if they are to be used for hedging as the maths dont pan out how you would necessarily expect,
Anyway these etfs are tools that can assist with hedging but always bear in mind they should be only short term when you are expecting a big fall from a market high and can easily close for a small loss if market leeps making new highs, for example suk2 is a short UK100 x2 (you get double the winnings !), luk2 would be a long, I believe there is a uk3s (3x) also, midd is a ftse 250 long. I have personally only restricted myself to these so far but there are many others available, all sgould be available with your broker on the search facility
Personally I missed out on the Big Drop as I bottled it for a small profit but I did make some on the bounce
Hope that helps with the query anyway

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slopsjon 8th Feb '18 37 of 53

Creightons (LON:CRL) have released an afternoon trading update. Having to outsource some branded lines so will affect full year profit.

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JamesrWilson1989 8th Feb '18 38 of 53

In reply to post #312473

Stonegate can have men on the inside but still doesn't mean they'll acquire the business. The last CEO supported the bid and had to fall on his sword when it wasn't passed by the shareholders.

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mammyoko 8th Feb '18 39 of 53

Revolution Bars (LON:RBG) - perhaps they'll use their sleepers to run the company down and then pick it up out of administration? Worked a treat with Bramwell

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Gromley 8th Feb '18 40 of 53

In reply to post #312583

I've read now read the Smokey Waters paper on IQE (LON:IQE) and although it claims  :

"Our research has been independent of ShadowFall, and ShadowFall’s report does not address the vast majority of the issues with IQE’s accounts we have identified."

It actually strikes me as much ado about nothing in terms of the extra value it brings over and above the Matt Earl piece, certainly it goes in to more detail than Earl did (despite being half the length) but to be honest I don't find that it raises anything new to be concerned about.

The major arguments seem to be that the creation of the JV with Cardiff Uni (CSC) created one off benefits during 2015 & 2016, this is true and has been somewhat done to death imo. The JV was created by Cardiff Uni putting in cash and IQE putting in equipment and IP (some of which had appreciated over book value).

They then try to make capital of the fact that many of the JV employees seem to regard themselves as IQE employees. Having been part of a JV in the past (between two commercial entities) people tended to still associate themselves with the original parent and in many roles the JV was acting as an agent on behalf of the parent(s) , generally in this context any given individual would generally only be an 'agent' of one of the parents.

If you look back to the aims of this JV from the original notice of formation you can see :

Both partners see very significant benefits accruing from the JV.
Cardiff University will now have a very clear and effective route to commercialise the World Class R&D to be carried out at the ICS, and will be able to attract significant Corporate and other R&D funding,
whilst IQE will be able to take the technologies developed at ICS and the JV directly into large scale mass production.
So in other words it is an IQE R&D "facility" that is jointly owned by IQE and Cardiff Uni.My reading is that the commercialisation will be done by IQE and it is not therefore surprising that the soft branding is IQE.

Smoky then highlight that CSC has continued to rack up costs/losses -er yes that is how R&D goes until you get the big commercialisation - AFAIA the technologies that IQE is currently selling into the market have not yet come from CSC.

Maybe they are right to ask whether Cardiff Uni were shrewd enough in the deal, who knows, although I'm not aware of them complaining.

Finally, Smoky sings says : "In the meantime, shareholders should ask whether IQE’s financial performance since 2015 can be sustained."

Alluding to the similar nonsense that Earl came out with , that IF 2015 & 2016 profits were "inflated" by the creation of the JV then we should discount the value of IQE accordingly.

However over the last couple of days we've seen analysts at both Barclays & Stifel (and possibly others) confirm that JV licencing revenue does not really feature  in their forward forecasts - on which the valuation of IQE is predicated.

IQE (LON:IQE) meanwhile have issued a further rebuttal mostly refering back to the reponse to Shadowfall, but providing a bit more of some of Smoky's "new" claims.

"Information in the Muddy Waters report is either factually inaccurate or has previously been disclosed in IQE's annual reports and financial statements."

Any other "independent" analysts who want to publish regurgitate the same thing had better get a move on as the credibility of these reports largely swing on the fact that the last published FY results are from 2016 when the JV business was a significant part of profits. Pretty much everyone except for Shadowfall & Smokey already know this was not the case for 2017 (or beyond) - from the December TU, but once those figures are formally published it won't be so easy anyone to conveniently overlook them.

Of course I'm long and could just be "talking my own book" , but I honestly don't see any foundation or merit in these arguments. As ever though I really welcome thoughts to the contrary.

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seadoc 8th Feb '18 41 of 53

In reply to post #312798


"I've read now read the Smokey Waters paper on IQE (LON:IQE) and although it claims :

"Our research has been independent of ShadowFall, and ShadowFall’s report does not address the vast majority of the issues with IQE’s accounts we have identified."

It actually strikes me as much ado about nothing in terms of the extra value it brings over and above the Matt Earl piece, certainly it goes in to more detail than Earl did (despite being half the length) but to be honest I don't find that it raises anything new to be concerned about.

The major arguments seem to be that the creation of the JV with Cardiff Uni (CSC) created one off benefits during 2015 & 2016, this is true and has been somewhat done to death imo. The JV was created by Cardiff Uni putting in cash and IQE putting in equipment and IP (some of which had appreciated over book value)."

I did think this might happen:

Posted on LSE, IQE board, under subject "goooba" on 24 Jan '17

"... do you remember what drove it up so high in 2010, and why it fell so hard in 2011?"

From about 2008 the sp was driven up by the news of moving to Singapore and the potential for further production on plant that had to run 24/7 was unlimited, all extra contracts went to bottom line. It was darling of tip-sheets and IC. It peaked in early 2011, ?Feb, it then fell off a bit before precipitous drop on 26/10/2011 on a profits warning because of "de-stocking" by its clients. I suspect they were being undercut by competitors but have no evidence for my speculation.

For some reason I can find no record of an RNS on 26/10/11 nor is there any discussion in annual report to yr end Dec 2011 so all this from a geriatric brain. Make of it what you can. For the sake of all posters who are invested I hope my fears are unfounded. If I were to predict the basis of my hypothetical profit warning it will be unexpected support needed for new CSAC in Cardiff.



Still short IQE (LON:IQE) and if anyone wants the smokey waters (sic) report look under MuddyWaters:

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Michael Billingham 8th Feb '18 42 of 53

38 million shares traded in IQE today.

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Gromley 8th Feb '18 43 of 53

In reply to post #312803

Thanks Seadoc,

Oops went off piste and referred to smokey waters - not an attempt to be clever or disparaging, just a senior moment I'm afraid.

Anyway, I agree that the need to provide more funds to CSC (together with the Uni) is one of the risks and certainly at the current frisky time that would be significantly shareprice impacting (probably far beyond the investments involved).

Clear cash generation (and the ability for Capex to deliver over it's full lifespan) remains an unproven for IQE (LON:IQE).

Interesting point about 2011 too - the RNS is here

A small number of IQE's major wireless customers have advised that an inventory correction is affecting their forecast short term demand.  This appears to reflect a combination of some market share shifts between chip companies and the difficult macroeconomic environment.
IQE is an existing supplier to the chip companies that are benefitting from these market share shifts, albeit to a lesser extent

That would explain some of the negativity towards the recent mentioned of inventory reduction in Wireless - in this case though AIUI that was at IQE's behest so that they could focus capacity at VCSELs.

Given that IQE still seem to be the majority player for CS wafers for wireless, having not read back that far previously I find some encourgement that they have retained that position over 7 years or more.

Anyway you've sparked my interest there, I will look back at 2010,11&12 now - Thanks, it's not like I have anything else to be doing !!! ;-)

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matylda 8th Feb '18 44 of 53

In reply to post #312808


Blog: Briefed Up
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peterg 8th Feb '18 45 of 53

Re: Connect (LON:CNCT)....Business in terminal decline, dividend looks tempting but is actually a red flag because it’s so high.
Eps trend continually heading down.

It is in decline, and probably terminal, ultimately. But the rate of decline is low. It is most definitely not a growth stock and won't appeal to many. However the prospective dividend is 15% at current prices and covered 1.5 times. It would be no surprise to see a cut, but a 10% dividend would probably be covered 2x probably for quite a few years if nothing much changed. 

The Aurelius situation is obviously a mess, but it will probably sell in time, likely at a lower price, but it is a relatively small part of the group business, and not apparently been contributing much to profits recently. 

It's hard not to see some improvement in the SP, and good dividends, over the next couple of years if things pan out as currently forecast.

I don't assume that it's impossible to make money on shares in declining sectors if the price is right, any more than I would assume that money can be made with low risk on growth stocks with are highly priced.


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Cisk 8th Feb '18 46 of 53

In reply to post #312538

Sunny, personally I have avoided looking at my portfolio page like the plague since this correction began.

Although I'm not geared and add to my positions automatically each month so I'm less concerned with daily movements (although the value of the portfolio is far, far greater than the drip feed).

How I handle it:
1. don't look at your portfolio value declining each day. It's only money and not real until you sell.
2. Ignore all market commentators, and esp. analysts. If they could predict the future you would have never have heard of them, as they would never tell anyone and be living on a private island.
3. Ignore people who say this time it's different. It's not.
4. Look at what happened last time, and the time before that etc. If my (poor!) memory serves the stock market wobble was a precursor to house price collapse.
5. review your holdings. sell anything you're not 100% comfortable with. use those proceeds to add (drip feed) with those that you are comfortable with. Have the strength in your convictions and hold your nerve.
6. Call up an old friend or family. They're more important than stressing over the market.
7. It will rebound. It's juts a question of when. Rubbish companies won't, quality will and will grow stronger.
8. And don't fret over the macro picture e.g. N Korea etc and its impact on your portfolio. If the worst happens and a factory owned by a company you have shares in gets destroyed, I think you'll be worrying about something far more important than a single company.

As I write (from west coast USA) the Dow tumbled 0ver 4% so there's bound to be a rocky opening. Oh and ignore anyone who says that it's different for the UK, UK market isn't as overvalued as US etc etc - that may be the case on fundamentals but the markets always move together (at least in the short term).

Apologies this wasn't supposed to be as long as it turned out - I'm actually self-counselling ;-)

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Michael Billingham 8th Feb '18 47 of 53

In reply to post #312848

IQE (LON:IQE) evidence of the heavy trading this afternoon.

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Gromley 8th Feb '18 48 of 53

In reply to post #312888

IQE (LON:IQE) evidence of the heavy trading this afternoon.

So Michael - are you providing it or asking for it?

Or maybe explaining it?

I'd like to think that part of your post went missing?

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Sunny350 8th Feb '18 49 of 53

--- reg hedging / market corrections
To Paul, Simoan, threeputt, mammyoko and Cisk -
Thank you very much for taking the time and your very helpful comments. Really appreciate it!!

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Velo 9th Feb '18 50 of 53

Connect (LON:CNCT) - The p/e ratio is P/E 4.38  and the divi yield is 15.6%
(Sold awhile ago so unaware if the divi has been suspended, cut or whatever)

- Isn't there a rule of thumb somewhere that says "beware" when a stock shows a dividend yield higher than the P/E ratio number?

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JohnEustace 9th Feb '18 51 of 53

In reply to post #312923

There’s also a maxim about buying when everyone else is fearful. I was thinking to put Connect (LON:CNCT) on my watch list and bide my time until there’s clear evidence of some recovery in the SP.
But is there a chance of an opportunistic bid coming in while I’m waiting?

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dscollard 9th Feb '18 52 of 53

In reply to post #312893

It seems a reasonable observation that IQE (LON:IQE) sold-off heavily on almost twice its daily volume. It might be a directional tell and if nothing else, sums up the current sentiment on IQE (LON:IQE).

That might be uncomfortable reading if one is long but equally might be cheering if one is short. If one has no position then it is a data point, nothing more.

Let's not descend into bulletin board style emotional sniping and cat-calling. Stocko is above that and is a refuge for those who have suffered the slings and arrows of outrageous outrage.

Sometimes data without bias or opinion is useful.

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tony akram 9th Feb '18 53 of 53

In reply to post #312883

Cisk- Excellent advice struggling with point 6 though lol!!!

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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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