Small Cap Value Report (Thur 13 June 2019) - REC, TAP, VLE, SPE, WINE

13th Jun '19 by Graham Neary

33 comments 9924 reads

Good morning!

A few things to look at today:

Record (LON:REC)
Taptica International (LON:TAP)
Volvere (LON:VLE)
Sopheon (LON:SPE)
Majestic Wine (LON:WINE)

Record (LON:REC)

Share price: 33.4p (+15%)
No. of shares: 199 million
Market cap: £66 million

Final Results

(Please note that I have a long position in REC.)

After a period of what feels like relentless decline, it's nice to finally see some positive results at Record.

I've described this as a low-conviction holding - see my discussions at the last trading update and in more detail at the interim results.

It's a currency manager, helping dozens of institutional clients to deal with their currency exposures.

In recent years, it has suffered from competitive pressures on pricing and overall growth has been very limited, particularly when it comes to client numbers. Performance fees have withered.

However, I took the view that downside risk was limited by Record's fortress-like balance sheet, and that its highly-invested managers and motivated staff might come up with ways to reinvigorate it. But it was impossible for me to have a strong belief in this!

Results

Today's results show almost everything moving in the right direction.

Fees - The company's pricing model has changed, so that certain products which used to charge a management fee only, now charge a reduced management fee but also come with a performance fee.

It turns out that this has increased the total fees charged, at least for FY 2019.

Record's long-term track record of outperforming its benchmark (in the "Enhanced Passive Hedging" product) suggests to me that there is scope for the performance fee element to increase in future years. It outperformed its benchmark by 5bps in 2019, but the 5-year average is 12bps per annum.

On a big-picture view, "Average management fee rates for most product lines have remained broadly constant throughout the year ended 31 March 2019" - it's hard to deny that there is still some pressure on fees.

Clients - This number of clients is unchanged since the recent Q1 update. 65 clients is encouraging vs. 60 at the previous year-end. Three commercial relationships were lost,…

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JohnEustace

13th Jun '19

Graham,
Why do you prefer to hold Record (LON:REC) over Alpha FX (LON:AFX) ? I usually prefer the disruptor over the disrupted!

Edmund Shing

Hi Graham,
Don't understand your arithmetic re Volvere (LON:VLE) Volvere here. You say the Lander brothers have sold most of their shares, but their share of the outstanding shares falls from 30% to 19%. Have the number of shares outstanding dropped that much, given a take-up of only 39% for the tender offer?

Thanks,
Edmund

Hi again Graham,

OK my bad, I didn't read the RNS properly. So the number of shares outstanding has dropped by 31% pre- to post-tender...

Fair dos, the Lander brothers have to congratulated for their impressive track record of late! They seem to have taken up this mantle from Melrose Industries (LON:MRO), who have perhaps bitten offf more than they can easily chew with the GKN acquisition...

Make I take this opportunity to thank you for your efforts on the SCVR, excellent reading (between you and Paul)...
Edmund

seadoc

jones, Good comment but I got into Volvere (LON:VLE) early 2017, I am not playing the hokey pokey but saw it as a one off and followed the Landers. I have a return of 66% and annualized at 27%. I was given the right to sell half and the option to sell all. I agree that the spread is significant which is why I went "all-in". Graham and I took opposite paths (and he is the professional!) and I am grateful for his post and look forward to his report of the AGM. The best I can get on instant access is 0.5% and so the cash will stay in the ISA earning next to nothing.

LeoInvestorUK

#VLE - some excellent points.

I think which adjustments to earnings you make depends on the context. Excluding amortisation of acquired intangibles clearly makes sense when looking at like-for-like figures for example. Purchase costs should be spread out and in most cases a good approximation is to exclude them. Excluding share based payments can make sense when comparing figures year to year as they can be volatile for purely technical reasons, whereas excluding them entirely for calculating operating margin seems like nonsense.

They did at least have a detailed and honest-sounding description of each adjustment so you can make your own mind up. These were the adjustments I made this morning when to calculate underlying profitability and therefore operating margin:

Severance costs in China due to the reduction in legacy business: $1.5m – similar costs occurred last year and more are likely in future, either as part of the same trend or unexpected business changes. I’ll allow $0.7m.

Closure of Indian factory as part of rationalisation: $0.5m + $0.3m. If you accept this is now full closed then this is a true exceptional cost.

Legal charges and staff retention costs for acquisitions: $1.8m The former is certainly exceptional. The later may have an ongoing element. I’ll allow $1.5m. The amortisation expense can be useful to exclude in year-on-year figures but will be ongoing and so not for other purposes.

The GMP pension changes are one-off: $0.2m net.

The share based payments charge is up from $1.1m to $2.2m. Some of the difference is exceptional. I’ll allow $0.9m.

My adjusted operating profit is then 13 + 0.7 + 0.5 + 0.3 + 1.5 + 0.2 + 0.9 = $17.1m, giving an operating margin of 17.1 / 372.1 = 4.6%.

I believe there is a genuine transformation well in place from an uninvestable, low margin business, to something I would like to own for the long term. With a full-year contribution from higher margin acquired businesses baked in for next year, this still looks cheap to me on a forward PE of 8.8x (brokers say 9.6x-10x FY20) and I bought more this morning.

Graham Neary

^^^ Leo, you are clearly talking about VLX, not VLE. You had me very confused there for a minute!!

mojomogoz

Copy and paste from other discussion. Not a recommendation on Taptica International (LON:TAP). Its very uncomfortable. I often pick up stuff with hair like this where I disagree with prevailing sentiment and I'm sometimes painfully wrong (AA (LON:AA.) is my other recent purchase...lots to be anxious about there too!). But externalising is a way for me to feel stupid quicker if I need to...and maybe before a price crash if I'm lucky. I know the sentiment is negative but I'd be interested in a bear making a case (beyond corruption) for why this should be valued even lower...you may be right after all! :-

On the much hated Taptica International (LON:TAP)...and there's very good historic reason to give it some hate as a lot to digest in recent times that has not been good..

Today's AGM statement says $70m cash. I checked and that is net. Means since last available accounts of #TAP and acquired RhythmOne there's been $20m cash generation. Mkt priced as very broken but something is working.

Broker has revised down sales for the year as performance marketing is still struggling. However, company guides that they are still okay with profit expectations in market (which were revised down earlier in the year).

Its impossible to see anything very clearly due to the "transformative" acquisitions and the noise around CEO change. Company no doubt got themselves in a hole....and new CEO obvs had them over a barrel for a very handsome share package.

But we are left with a business valued at £125m with £55m cash and a PBT expected of just over £50m. Op margin somewhere north of 10% and perhaps into the teens with a business that now has a better waterfront position in ad tech space rather than old niche position with a transformed focus now on US (prior to Tremor and RhythmOne acquisitions this was non-US revenue business) with some top brand clients. Its risky but they are looking like a winning consolidator in the space. Taptica have a track record of acquiring and integrating well. They seem quite fierce on it too....google some staff responses from old Tremor people and they felt a real shock when Taptica took over and shook up the place.

None of the above can be considered safe and quality but it does seem that there are high odds that the market is not weighing this situation correctly. Not for the feint hearted. Expect lots of unnerving volatility even if the outcome is good over the next 2 years as it will take time to set a positive narrative over the negative.

PS obviously there is a big working capital element to Taptica International (LON:TAP) that comes with the ad tech business plus acquired Tremor seemed a bit lax in their financial management (significantly straightened up by time of last full year Taptica results it seems). My impression of mgt is that the CFO is diligent. He's now moved to the US to focus on RhythmOne integration. Historically, Taptica have been tight on managing working capital and cash flows so I'm assuming this is the case now. Note that they are only reporting with a couple of months of R1 under the belt so cleaning up their mgt processes and cash flow will not be very progressed....there will be non cash intangible write downs from this process but there could be cash generation upside based on past experience.

A lot makes me uncomfortable. I'd like clearer disclosure in the accounts. The management change is unnerving. I feel the chairman (who is more important than normal as UK based and the continuity item) is a bit of a muppet IMO - for someone with a comms background he's bad at it and/or he's trying to talk the stock down (feeds some of the bulletin board conspiracy stuff). But cash is the proof point against the anxieties. Hard to see through the smoke but my sense is a good probability that the business will be valued significantly higher in future. Even just a bit of scepticism on company and not much love and wariness on Uber legal case should see this 2-3x higher in price. Actual love and +5x.

Bulletin boards and twitter talks up insider fraud and malignant stock manipulation. Well, this does happen and if it is happening here I'm toast. Too me it looks like a messy and fast moving entrepreneurial company iterating in a fast changing space (and so far doing it well).

Improved communications and disclosures would be welcome.

mammyoko

Yes, you're right. My comment suggests a level of forethought. The reality is that Record (LON:REC) has struggled to sell the benefits of its higher-margin dynamic hedging product. It is starting to feel a bit like a company that is run more for the benefits of the directors than shareholders, hence the frustration.

You may or may not be interested to know that Neil Record has publicly funded the Global Warming Policy Foundation, a man-made climate change denying pressure group. For me, learning that has started to make this a share, which is dominated by the Chairman, one to be avoided.

Graham, yes, sorry I was talking about Volex (LON:VLX) and the edit window has now passed. Thanks for getting in with the very next comment, hopefully that will minimise confusion!

As always would be very interested in your opinion on Volex (LON:VLX) if you have time today.

rmillaree

mojomogoz
Taptica International (LON:TAP)
Bulletin boards and twitter talks up insider fraud and malignant stock manipulation. Well, this does happen and if it is happening here I'm toast. Too me it looks like a messy and fast moving entrepreneurial company iterating in a fast changing space (and so far doing it well).

Has it not already happened here ? i though the ceo got the push due to "dodgy activities" not so long back - if that was the case why would anyone in their right mind touch this share with a bargepole however cheap it may appear?

I feel the chairman (who is more important than normal as UK based and the continuity item) is a bit of a muppet IMO

Generally if there is dodgy dealings going on then a muppet like chairman sounds perfect for the job presuming they are not inside whatever is up?

It seems a recurring theme with the listed companies generating millions from advertising revenue that it suddenly dries up to the extent one wanders if it was ever there in a real and honest fashion? Even if it is in a real and honest fashion - money that easy to come by and someone else will take the business elsewhere on cheaper terms or presumably replicate what they fo. when the wheel stops there is no value in anything.

Hopefully my worries are far from the mark and i admit that i have spent no more than 5 minutes today researching this company so i am making these comments from a very uninformed position.

Hi rmillaree

Thanks for points which are on the money.

The old CEO was done for fraudulent representation to a private equity backer buying an old business he started pre Taptica. I written about that somewhere in the past and will see if I can find. The short answer is that I started a company that overlapped and the electronic payments business I had to interface with really was the wild west 5+ years ago.

The judgement is in so he is defacto a fraudster (civil). IMO the PE company seemed like they didn't know what they were doing and there may have been a competence prob there. In addition, it revolved around paypal threatening to pull a payment processing service and that not being revealed. In my experience, if you are a fringe start-up fintech company the banks, payment companies and card companies are always messing with you. We had the threat of services pulled all the time...you sort of duck and dive make work arounds and have a thick skin about it...and if you are presenting your company to interested party you never say xyz financial institution is giving us a hard time. Why the hard time?...

Partly as there real dodgy companies in this space (and things like illegal porn/sex for sale, drug money, money laundering generally, etc etc...all the bad stuff in the world is trying to skip formal banking) and they are being cautious but partly it was a power thing to mess with companies that could be competitors. I got that a lot...for example, I had to complain thro official (govt) channels before getting an account from a mainstream bank! As an example Lloyds knocked me back as i was a competitor (with virtually zero and a bootstrapped business) and RBS said I could be a vehicle for fraud (no assessment just flip off).

Anyway, old CEO Tal may be very dodgy....but I suspect he's a hard arsed entrepreneur sort who breaks down doors in front of him. I think most successful entrepreneurs cross the line. And with VC and PE (particularly the former) they want you to over pitch them! Look what's happening with Facebook, Amazon or Uber....people don't like what they do and how they do it and its probably had a lot to do with being founder run from the outset. What these guys did to get anywhere in the wild west of internet will make toe curling tails for 'respectable' businessmen.

Make of the above what you will. I'm not seeking to excuse it. I use it as a little piece to see what I think is dissonance and misperception in Taptica International (LON:TAP).

Today there client base is much more blue chip and US based. The quality of their business has gone up...at the expense of some of the old quick profitable stuff that is performance marketing. Whether they did or didn't cross the line in that area is very hard to know (and its rough so everyone probably crosses somewhere and its a case of whether you had processes to try stop and reported probs back to clients).

Thanks

grumpy5

Re Majestic (LON:WINE) there is an absolutely epic amount of management BS to wade through before you get to hard news. Operating cash generation has fallen 75% or so. One wonders why the board sanctioned all the spending on customer acquisition for Naked before it got its hands on any sale proceeds from the Majestic chain. Further correction in view IMHO.

PS On Chairman. Yeah, that's a worry. He's savvy, connected and has made lots of money personally. He needs to keep a clean reputation to keep his various balls in the air. My little experience of him is I think he talks first and thinks later. I would like him to upgrade himself or for him to be upgraded. I note that a recent NED has distant association with him. This is not uncommon on boards of course

Gromley

Good summary of Sopheon (LON:SPE) Graham.

I think you are right to call out their less than clear use of language as it's something I've noted before (including in their sales literature) and rightly or wrongly it leaves me with a sense of distrust.

That's neither here not there, except when I start to think about this trading update. If it were not for this nagging distrust I would probably think their outlook view to be reasonable.

I am not averse to "H2 weightings" if that is the natural seasonality of the business, which might appear to be the case here.

"In previous years we have typically had a stronger second half and fourth quarter in particular, and we expect 2019 to follow this pattern."

I can think of three potential reasons for a H2 weighting :

Seasonality in underlying markets - not apparent to me that this would apply here (they don't sell ice cream)
Significant customers skewed to buying at a particular time of year (probably related to their own financial years) - maybe, but why assume that there new customers will have the same profile as their old ones?
Because their sales force really step up the pace as it comes time to calculate year end bonuses - This is not in jest, I have worked for just such a business and in fact it would be supported by the particularly strong 4th Quarter they speak of.

So is this "typical" H2 weighting borne out in their past results?

Kinda.

Stocko only lets me look back three years at the half year split (although I could go back further by looking at the source data).

H2 revenues have been higher than H1 in each of the last 3 years (+2%, +28%, +13%) which tends to bear out their argument.

However, the Year on Year position (ie H1 vs previous H1) tells a slightly different story as can be seen below.

So in 2017 H2 growth was well above H1 growth, but in 2018 the reverse was true.

That's potentially important because their comparison statement here is :

full year revenue visibility from contracted business and recurring revenue streams is at similar levels to this time last year, at $23m

Now I do not really know if we can also equate this as saying that H1 revenues will be at a similar level to H1 last year (by the way is "similar level" a bit like broadly inline? If it were only slightly ahead would they not say so?).

If we can make that assertion then H1 revenues of $15.9m would leave a requirement to make $20.9m in H2 to meet the stated forecast as per stocko. That would be growth of 16% over last year's H2 quite an acceleration on the 12.5% growth in the last H2 and zero in H1.

Now they have got some big "opportunities" in their pipeline that will no doubt at least bridge that gap if they come - maybe I am stretching the inference too far but I have a suspicion that they would have hoped to have closed some of those in H1.

So whilst I would not take this to be a full on profit warning I think there is a increased sales execution risk in delivering the FY numbers. Or as the analysts put it "an increase in forecast risk".

Does any of that matter? I don't know and I'm probably being to pernickety here.

davidjhill

Taptica International (LON:TAP) I don't think anyone can ever rule anything out even on stock market darlings. we only have to look at Pat Val for that lesson. However, the reasons some of us are acting in a contrarian way to market opinion is as follows.

1) They have just completed a $15m buy back so that does at least demonstrates that cash exists. On that basis there is little reason to doubt the $70m and the idea that they are going to do another buy back.

2) The new CEO actually came from a previous acquisition called Tremor video. He has a decent reputation and previously built/sold a $250m business. It seems unlikely that he would be complicit.

3) The old CEO lost a lawsuit in the US that was properly disclosed prior to IPO, and when the suit went against him he resigned. Board accepted resignation and replaced him. Again that kind of behaviour and management change doesn't throw up red flags around anything fraudulent. Usually you need tight knit management who have been around for a long time and have high levels of control over the business activity for fraud to occur. Pat Val was a classic example of that.

4) They just merged with RhythmOne, another independent firm. Lawyers have to do extensive DD on a deal of that magnitude and so I'd be surprised if the cash isn't real.

5) They've been pretty transparent about the RythmOne issues of revenue falling short against expectations.

So, in a nutshell you have a new guy at the top who has a reputation to protect, extensive legal DD done by two sets of independent lawyers on both companies, a buy-back executed as expected for $15m and some sensible looking trading updates. That business sits on a PE of 2* (ex cash) is highly cash generative with $70m on the B/S and no debt. The only reason that isn't phenomenally cheap by any set of valuation metrics is if it is an out and out fraud. The market is pricing the risk of fraud as extremely high - prob circa 80%; but there are a bunch of flags pointing to that risk being materially lower. From a personal perspective I now rate it sub 25%. On that basis I have opened a long position with the view that it is a 1:4 risk to reward ratio.

Surprised there is no talk on Onthemarket (LON:OTMP) on here today? I know Paul has a long position and sees it as a potential multi-bagger and that Graham prefers Rightmove (LON:RMV).

I am in the Paul camp on this one. Interesting today that their conversion to fee paying model has begun and is at 1000 agencies already at £337 p/m ARPA and is now covering operating costs. Marketing has been made more efficient (ie less expensive) and lead generation looks strong. They are now creating ancillary services to boost ARPA and replicate functionality of the other 2 portals.

Brokers seem to think it should be valued at somewhere between 210p and 260p which, is some distance from current share price. Have to say I was impressed with progress. Any other thoughts out there?

Taptica International (LON:TAP)
davidjhill and mojomogoz

Thanks for the extra comments most appreciated - i think i am up to speed a bit better than i was earlier today. seems like a similar situation to XLMedia (pe sub 5 and share buyback) albeit to a more extreme degree and a bit more murky, certainly as a binary option the upside potential does make these shares interesting.

johnsmith68

15th Jun '19

Hi David, I'm long Rightmove (LON:RMV) but I can see from their latest results that they may be getting complacent and simply milking their dominance by squeezing their incumbent agency base for higher fees without actually growing the number of subscribers significantly. Anecdotal evidence from estate agency blogs would appear to suggest that their tactics are loathed and that some agencies feel exploited by their dominant position. It's obvious that the agents would welcome some competition but I can't see how with the power of Rightmove's network effect, they will be usurped anytime soon. That said, I'm wary of Onthemarket (LON:OTMP) and as a holder of Rightmove (LON:RMV) I don't wish to be complacent of the threat. Comparing the most recent results from the two, Rightmove revenue dwarfed that of OTM by almost 19:1 and they made almost £200m profit versus OTM's near £15m loss. In achieving these figures, Rightmove spent around £70m on admin (mostly marketing and salaries) versus almost £28m for OTM. In other words, Rightmove spent double and achieved 19x revenue. That's the scale of the challenge for OTM. In order to tackle this challenge, they finished the year with £10m in cash whereas Rightmove were left with £15m having returned a staggering £168m to shareholders. Rightmove have 5 times as many employees (although payroll is only 4x greater). The key challenge for OTM is getting consumers to use OTM when looking to buy a house and whilst they are making some progress, Rightmove enjoy over 5 times as many visitors to their site every month. I recently sold a house and would not for a second have contemplated listing with an agent who did not subscribe to Rightmove and therein lies the biggest challenge because no matter how annoyed and exploited agents may feel, they dare not give up Rightmove altogether. They can try using both portals which is fine so long as they are on the free trial of OTM but when push comes to shove, will agents abandon Rightmove in their droves to list solely on OTM? I think for the foreseeable future, the answer will be no but I remain wary. It'll be fascinating to see if OTM can rise to this enormous challenge. Would love to hear any contrarian thoughts or any different interpretations of the two portal's respective results.

17th Jun '19

I think it probably worth noting the Onthemarket (LON:OTMP) forward looking view rather than historic results. There is a risk of comparing the results of 2 businesses at different stages of their business model to form a subconscious confirmation bias.

The key takeaways for me is that only at the end of the financial period did Onthemarket (LON:OTMP) start to move from their free trial model to converting agents. Over 1000 did so already and you would expect this to accelerate given conversion %ages to date. Importantly that is at £337 p/m ARPA, so £4m p/a on 3-5 year long term contracts.

Listings are now comparable @ 65% of Rightmove, consumer traffic is up 8% at 25m visits so clearly they are now well established as a "go to" product when searching for a house. The most interesting "sales" stat for me is that Onthemarket (LON:OTMP) now generate 30 leads per £100 spent. Rightmove (LON:RMV) have gone down from 28 to 17 per £100 spent. At an absolute level Rightmove (LON:RMV) is still at 171 vs Onthemarket (LON:OTMP) at 102 but that gap has narrowed significantly too.

Your cash figure is incorrect as Onthemarket (LON:OTMP) had £15.7m at 31st Jan 2019 rather than the £10m you quoted.

The key for me is this :
Rightmove (LON:RMV) is loathed by agents but is the incumbent and so I consider it will continue to generate good free cashflow over time.
Onthemarket (LON:OTMP) is converting and growing revenue rapidly and I think appears to be moving towards 2nd position in the market and will likely usurp Zoopla relatively quickly.

The relative values are Onthemarket (LON:OTMP) at £66m cap, expected to generate an eps of 14p in 2021 at current trajectory, so trades on just 7* fwd earnings. Compare to Rightmove (LON:RMV) at £5bn on 26* earnings.
I'd argue that Rightmove (LON:RMV) is now looking a bit toppy, whereas Onthemarket (LON:OTMP) has the opportunity to grow into a much bigger valuation, possibly several times its current size. The metric I am watching closely is the sign up rates to a paid subscription, but if this continues on current trajectory that is why I am long Onthemarket (LON:OTMP) and not Rightmove (LON:RMV).

mercury61

21st Oct '19

Record (LON:REC) somethings UP!

Small Cap Value Report (Thur 13 June 2019) - REC, TAP, VLE, SPE, WINE

Record (LON:REC)

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Graham Neary

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