Small Cap Value Report (Thur 10 Oct 2019) - OTMP, MCL, CTP, NMRP

Thursday, Oct 10 2019 by

Good morning!

Thanks for your suggestions.

Let's take a look at:

Onthemarket (LON:OTMP)

  • Share price: 81.75p (-2%)
  • No. of shares: 64 million
  • Market cap: £52 million

Interim Results

Please note that I own shares in Rightmove (LON:RMV), so I'm not exactly disinterested when it comes to the success or failure of Onthemarket.

This update show good growth in the number of branches listed (up 28% in the year) and excellent growth in traffic, with a 75% increase in the number of site visits.

I also note that its stock of available property has improved, and its stock is now c. 64% of Rightmove's.

It generated far fewer leads per property advertised than Rightmove, but it claims that if you adjust for how much more expensive Rightmove is, that it offers twice as much value (i.e. leads per pound spent).

The rate it uses for this calculation is £331/month, which is the rate at which long-term contracts are offered to agents, for 3 or 5 years.

It also offers short-term, low-cost contracts at just £203/month.

The bit where I have a big problem is that the revenue under long-term contracts of £331/month comes at a price in terms of share issuance.

The business model is to outcompete Rightmove (which itself was founded by estate agents) by regularly giving "free" shares to estate agents, to get them on board.

That's great for the estate agents, but this regular dilution says to me that it's unlikely to be a high-grade investment.

Indeed, the need to dilute shareholders risks creating a self-fulfilling prophecy, whereby a low market cap (c. £50 million) means that ever greater numbers of shares are needed to incentivise agents to sign up, only serving to make the dilution worse.

OTM recently reported that agents weren't committing to long-term contracts at the rate expected, implying that the existing offer of free shares wasn't enough to get agents on board. Hence, the introduction of short-term, cheaper contracts.


During H1, 1308 branches signed up for long-term contracts, receiving 1.8 million shares in return. That's about 1,400 shares per branch, with value of £1,100 (at 82p each).

That's about 3…

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All my own views. I am not regulated by the FSA. No advice.

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OnTheMarket plc is a United Kingdom-based holding company that provides online property portal services to businesses in the estate and lettings agency industry. The Company operates the United Kingdom online residential property portal, The Company's portal allows agents to display their properties to an audience of property seekers. Its online platform offers a search service and lists of homes for sale or to rent. The Company's portal offers saved search and property alert facilities to property seekers by creating a MyOnTheMarket account. Its portal provides an access to tools that enables manual property uploading, editing of property details and branch details. The Company serves home developers, online agent companies, commercials and property advertisers. The Company's subsidiary include Agents' Mutual Limited and On The Market (Europe) Limited. more »

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Morses Club PLC is a United Kingdom-based home collected credit (HCC) lender. The Company is a consumer finance business focused on the home collected credit market. The Company operates under the Morses Club brand and provides unsecured loans to customers over 20-78 week periods, which are repayable on a weekly basis. It provides a range of loan products through a combination of traditional and online marketing channels. The Company's main country of operation is the United Kingdom. more »

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Castleton Technology plc, formerly Redstone PLC, is an investment holding company. The Company is engaged in providing software and managed services to the public and not-for-profit sectors, mainly the social housing sector. Its segments include Managed Services, which consists of Castleton Managed Services Limited and Keylogic Limited, and Software Solutions, which consists of the results of Castleton Software Solutions Limited, Kypera Limited and Kypera Pty. It offers KYPERA FINANCIALS, a finance solution, which uses a single ledger format; EDRM, which is an electronic document and records management system that allows organization to manage its documents and supporting information; P2P, which manages repairs and non-repairs processes and integrates finance and repairs system; AGILE, OPUS SERVICE CHARGES and MANAGED SERVICES. Its subsidiaries include Castleton Technology Intermediate Holding Company Limited, Castleton Group Holdings Limited and Castleton Information Group Limited. more »

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  Is LON:OTMP fundamentally strong or weak? Find out More »

22 Comments on this Article show/hide all

MBFP Thu 8:18am 3 of 22

Morning Graham,

Shearwater provided an RNS:
'Shearwater Group plc, the organisational resilience group, announces that its group company, Brookcourt Solutions has secured a three-year contract worth £8.5 million in aggregate with a leading FTSE 100 global telecommunications company.'

SVCR hasn't covered this share for some time and I would be interested to hear your thoughts.
I have a small holding.


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InvestorJohn Thu 8:25am 4 of 22

Painful drop on Castleton Technology (LON:CTP) after a H1 2019 profit warning

CEO says
The second quarter of the financial year has been significantly weaker than we expected particularly compared to the strong comparable period last year. This is primarily due to revenues of a one-off nature.

EDIT: So they must have either lost a customer or else had some big one of sales last year that they were not able to repeat this year

It looks over sold at the current price of 50p

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fredericktug Thu 8:39am 5 of 22

Morning all!

Seconding £CTP amd £MCL please? Hold neither but they were on watchlists (& price alerts). I'm not sure £CTP is oversold at 50p if this years EBITDA is a miss on £2.5m. £MCL looking tempting for the income portfolio...

Also - what looks to be a decent update from £XPP + special dividend. market seems to like. I'm holding here.

Damm tickers still not working on the new site??

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Henry Walpole Thu 8:52am 6 of 22

Morses Club (from their website)

Representative Example:

£200 loan repayable over 34 weeks at £10 per week, Rate of interest 107.1% p.a fixed; Representative 466.37% APR, Total amount payable is £340

466.37% APR!

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tb1234 Thu 8:55am 7 of 22

Another for £CTP please. 

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rmillaree Thu 9:34am 8 of 22

XP Power (LON:XPP)
the Board anticipates the Group’s performance for the full year will be in line with its current expectations as outlined at the time of its interim results on 1 August 2019

In some respects an inline trading update is good news as they had a poor first half and needed some h2 growth to avoid a very poor year. At least the ytd order intake how now turned positive.

Note although the update is inline, its not particularly great news compared to where we were on h1 update day (1/8) as the broker forecasts for this year and next have reduced materially since then. I am presuming that is simply delay in forecasts being updated after the h1 news.

The trend in normalised eps is down over the last 3 years however that's expected to bounceback next year , net profit has hardly moved since 2017 although next year is expected to show 10% increase. Note in this period they have had material acquisitions that have flattered the figures. At present the next year forecasts do look somewhat glass full - albeit q3 order intake is up 8% on the prior year so a flicker of light.

The shareprice has done ok recently improving 20% since the interims presumably the bottoming out of the poor trend in numbers has probably helped. I am still a happy long term holder in this share albeit it doesn't particularly look cheap at present if we give the company no credit for the recent patchy results and increased debt level they currently carry compared to prior to 2018 (they are normally a reliable cash making machine)

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Thornabian Thu 10:01am 9 of 22

I do like OTM (also own shares), once they reach IT and sales personnel capacity I can see large potential for leveraged earnings to overheads.

The key risk is their cash burn and conversion of free to paying contracts which they seem to be very actively addressing by offering cheaper short-term contracts.

There is a risk they will need to go back to markets to raise funds at the end of 2020 if they don't continue the current trend of conversions but I do think there is a large potential upside.

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Camtab Thu 11:07am 10 of 22

Nothing of interest for me, so I am going to be boring. Long long recovery since 2008. Brexit, who knows? Trump destroying many of the traditional relationships in the West. Rise of the strong man. Historically low interest rates for long time. Glass half full, empty? Just interested to know what investors are thinking. Traditional view at this stage is cash/gold/quality and NOT AIM stocks.

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intuitive6191 Thu 11:49am 11 of 22

In reply to post #520321

Morses may well charge a high rate of interest – but this is only of use if the borrower actually pays up. If a borrower defaults, it takes a considerable amount of time and effort to jump through all the hoops (agent visits, letters etc.) to pursue what could well be a lost cause.

In tough times, the combination of reduced repayments and increased admin costs is quite a burden and for me makes this type of lender impossible to value.

The history of such unsecured lenders isn’t very encouraging either e.g. Cattles. There do seem to be many bumps in the road, all of this before you consider changes to legislation and possibly a different government in the not too distant future.

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aflash Thu 11:55am 12 of 22

In reply to post #520391

Some think small caps offer value. US tech carries premium.

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cholertonandrew Thu 12:17pm 13 of 22

Paul- if you should be reading, I wondered if you spoke to Intercede management and I’d be interested in what your thoughts were.


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jwebster Thu 2:07pm 14 of 22

In reply to post #520321

Morses Club (LON:MCL)

Yes, the APR of 466% is high. It's a function of the small loan size and high default rate.

With this example, if you give out loans of £200 and earn £140 in interest, then that £140 has to pay for:
1. bad debt. If 1 in 5 loans are bad debts then write off £40 from that income
2. marketing costs of sourcing new business
3. running the agent network - the door to door collectors earn commission
4. central overheads
5. funding costs, they are not a bank so have to arrange commercial funding
6. Return on equity - as a sub prime lender, they will be on low leverage

I'm not advocating high cost lending, just using this example to demonstrate the margin dynamics of small loan sizes.

According to Stocko Morses ROE is 23.5% which is good but not so high given the risk.

No question Morses is cheap with a PER of 8.5 and dividend yield of 7%.

Your point of exclamation on the 400% APR is valid, in that any lending over 100% is classified as high-cost short-term credit, such that they are squarely in the regulatory space under scrutiny.

So any position here as an investor, you must have a view on the regulatory landscape regarding the FCA and the FOS.

My view, sub prime lenders are interesting in a recession. Any lenders with weak balance sheets, over-extended lending or short funding lines exit. The survivors gain a bounce post recession from a larger customer pool and less competition. I'm not sure we are at peak pessimism yet, but this sector is getting beaten down.

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Aislabie Thu 3:29pm 15 of 22

Tekmar (LON:TGP) has reported today on an acquisition that appears well placed to add to their offering in the undersea cable business. Tekmar does not yet appear visible to most investors and there may be chance to invest in what seems to be a good company holding a strong position in its market.
Significant part of its business relates to offshore wind power and while this is of course a hopelessly inefficient and unreliable source of power that a sane government would have quietly strangled, it does not appear likely that we will have such a government in the near future.

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Zipmanpeter Thu 3:35pm 16 of 22

In reply to post #520441

Re £MCL - I think the H1 results were OK and that the 38% decline since peak (176p in March 19) reflects wider economic concerns and the short term losses that taking on Curo & U holdings, plus the fear of a radical Labour govt.  It has not really been problems with £MCL or its business plan.

Graham, to me the long term game plan is a clear  2 step: 

1.  Slowly grow  current doorstep lending and its profitability  - by folding in exiting small players forced out by ever more  onerous regulation and cherry picking its best customers to make a very profitable, cash generative business with a high (relative) quality loanbook generating lots of cash

2.  Use this cash (and to a lesser extent, this consumer base ) to build a specialist sub-prime consumer focused digital financial services provider.  It now has in-house as well as Home Collect, online loans, basic banking and cash cards having bought complementary assets on the cheap.  No other provider, even Provident has this breadth of offer.  Lots of work to tie it all together but a huge opportunity relative to current size (& valuation).  Big banks and start ups never do well here but conservative specialists certainly can

I think quite rapidly (3-5 yrs) the Digital division will grow to equal and then surpass the by then declining doorstep lending operations but the latter will provide steadying ballast as this occurs

The whole "non-standard" and especially sub-prime sector is unloved by investors and undervalued.  I (wrongly) backed £NSF and their experienced mgt team.  They created real value through the Every Day Loans branch network but over-reached themselves and fought the last war in trying to take on £PFG . 

In contrast, I think Morses Club's management have been much more canny and will win big once the integration costs are behind them and a few more competitors are pushed out.  The poor are not going away any time soon nor their propensity to take on debt and they will need loans and baking services.  Who else offers PAYG transactional banking to these types of borrowers?  Who will then provide them with online loans?  I like how they are testing small and cheap to learn; portal and Morses card both now at >30K users now.

Only a radical govt or regulatory overhaul (eg a Labour govt setting up a national poor person's bank) will stop Morses becoming a success, I believe.

I already own a small stake in £MCL and will buy more on weakness as, actually, I think they will do well in Brexit meltdown, as the govt firstly underwrites their final customer's earnings through welfare payments and secondly, both Tory and Labour govt now compete to shower cash on previously forgotten towns in the North where MCL is centred.

So short term, 7% dividends look secure given the strong cashflow against a robust balance sheet.  Long term, I think its share price will appreciate.

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rmillaree Thu 4:29pm 17 of 22

In reply to post #520461

Significant part of its business relates to offshore wind power and while this is of course a hopelessly inefficient and unreliable source of power that a sane government would have quietly strangled,

I thought windpower was starting to make progress now? - i know it used to be something like treble the cost  but from stuff i have read the trend isn't too far away from being in the right ballpark if you exclude the extra one off costs of connecting to the grid and i would be gobsmacked if its not cheaper than the new nuclear power station we will never build. I exclude those costs as every new power plant must have costs to connect it to the grid.  I would agree we are probably not quite there yet as there will be much more flexibililty when associated battery storage prices hit rock bottom - and we are still i think testing bigger and bigger turbines. There is the danger i am reading the wrong biased websites in that regard (though i must admit i do like wuwt - as i thing some of the renewable spin end of the world stuff might  be  a tad excitable in the extrapolations)

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Graham Neary Thu 4:32pm 18 of 22

In reply to post #520466

"The poor are not going away any time soon nor their propensity to take on debt and they will need loans and baking services."

Is this your way of saying "let them eat cake?" :)

Thanks for the comment Peter.


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Matthew Hadden Thu 5:34pm 19 of 22

In reply to post #520476

Offshore wind is now a mainstream energy source, by 2025 offshore wind will be producing wholesale energy at under half the cost of nuclear, and below the wholesale market price.

Opportunities for clean electricity to be stored and transported are only starting to become established, but once they do, electricity generation could be used for transport and heating our homes in a way we've never seen before.

This will fuel huge market growth in these technologies and any business placing themselves to serve this market has great potential growth opportunities in my opinion.

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Howard Adams Thu 6:02pm 20 of 22


For those who trade US stocks (or Canadian) you might be interested in this from Charles Schwab

'On 10/7, Schwab eliminated online stock, ETF, and base options commissions for trades placed on a U.S. or Canadian exchange.¹ (NOTE date is US format thus it's 7th October 2019).

I do not yet have an account, but my investing friend does and says it works fine and saves a great deal of money on spreads and trading costs. I will be opening one very soon.


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Zipmanpeter Thu 8:43pm 21 of 22

In reply to post #520486

Half baked analysis from me, I guess

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kashawood Fri 3:09pm 22 of 22

Regarding further research for NMRP as an investment. Please see page 26 of this report :

The whole report is also essential reading.

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 Are LON:OTMP's fundamentals sound as an investment? Find out More »

About Graham Neary

Graham Neary

Full-time investor and independent analyst. Editor at Cube.Investments, small-cap writer at Stockopedia. Previously a fixed income analyst in the City and institutional fund manager. I'm a CFA charterholder and have the Investment Management Certificate and STA Diploma in Technical Analysis for good measure. When I'm not talking about finance, I enjoy recreational poker, chess and Mandarin Chinese. more »


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