Small Cap Value Report (Thur 16 August 2018) - VLG, OTB, 7DIG, RNK, ASH, FTC, TRB

16th Aug '18 by Graham Neary

31 comments 12898 reads

Morning all,

Things I've noticed today:

Venture Life (LON:VLG) - trading update
On The Beach (LON:OTB) - acquisition and trading update
7digital (LON:7DIG) - preliminary results
Rank (LON:RNK) - final results
Ashley House (LON:ASH) - preliminary results
Filtronic (LON:FTC) - final results
Tribal (LON:TRB) - half year report

Venture Life (LON:VLG)

Share price: 47.8p (+3.5%)
No. of Shares: 84 million
Market cap: £40 million

We covered this when it did a £19 million placing last month, to acquire Dentyl mouthwash and generally strengthen the company.

It already has the UltraDEX mouthwash brand.

We have 6% organic revenue growth in H1 to £8.3 million and a full-year outlook in line with expectations.

The order book is up 20%. I'm not sure how much to read into that - we don't know how long it will take to realise these revenues. Still good news, though.

UltraDEX is entering Spain, Portugal and Belgium from Q4 2018 and is set to enter Austria and the U.A.E by Q1 2019. The total number of markets where the brand will be "partnered" is set to double from 15 to 30 by the end of 2020.

My view

I wish there were fewer moving parts, as a little bit of guesswork and maths is required to figure out what is going to happen next. We have UltraDEX and Dentyl now and will probably soon have more acquisitions. It's impossible to have much of a clue about whether a future acquisition will work out or not.

Using back of the envelope figures, I think VLG might have c. £10 million of cash left from the placing, after paying down debt and buying Dentyl.

So let's estimate the current enterprise value at £30 million (market cap £40 million minus £10 million cash).

UltraDEX made operating profit of £600k last year and this is presumably going to show a nice increase.
Dentyl made PBT of £1.2 million. This has been trending lower but of course VLG's plan will be to turn this around.

If you think about what the combined operating profit of these mouthwash brands could be and…

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Graham Neary

16th Aug '18

DrVodkaQuickStep is our resident expert on this stock, I defer to him. I will link to his article. G

Tortoise investor

This blog has previously discussed how one of the benefits of online businesses is that they can reduce their marketing spend (often their main cost) in response to falling demand or a poorer economic environment. The On The Beach (LON:OTB) update this morning was evidence of that. Unsurprisingly they have seen a fall in revenue due to world cup and hot weather but they are not changing their expectations for the full year as they have reduced their marketing spend in response. "Whilst August and September are important trading months for the Group, the Board continues to expect that adjusted PBT for the financial year will be broadly in line with management expectations." I hold and took the recent dip as a buying opportunity as there is nothing fundamentally wrong with the business.

jonthetourist

I would be wary of thinking this way. Yes, marketing spend can be cut back to meet financial targets. But that marketing wasn't planned as meaningless entertainment. The act of cutting back has just made next year's sales targets more of a stretch. If the company choose to spend more at some future point, cash needs to be deployed into less effective channels, since your original plans always cover the most cost-effective ones. It's a slippery slope.

Anyway, good luck with the holding.

Jon (ex holiday co marketing director)

Reacher

On The Beach (LON:OTB) is an interesting company and today's announcement was twofold: a trading update which was cautious due to the hot weather and World Cup, and more importantly the acquisition of Classic Collection Holidays.

I found this to be interesting: the acquisition price of £20m is 7.7x EBITDA in 2017 and 2.4x NAV seems very reasonable. Looking at what Classic offers is an expansion of OTB's offerin. Classic focus on luxury beach holidays and these are sold via travel agents with no online offering to the consumer. OTB intends to leverage its technology to make this better. It provides them with access to the 5 million short-haul beach holidays booked offline. Therefore, Classic is not a direct competitor of OTB but will allow OTB access to new markets.

It seems an astute acquisition.

bestace

If I have correctly recalled Paul's previous comments (as alluded to by paraic) about marketing costs being dialled back for high growth, online businesses, it's that there is a difference between marketing spend in absolute terms and in relative terms (i.e. as a percentage of revenues).

On The Beach (LON:OTB) is a good example of this: in absolute terms, marketing spend has been increasing year on year since well before it listed. However in relative terms, marketing spend peaked at just over 50% of revenue in FY14 and has been declining ever since, to just over 40% in H1 2018:

Granted it sounds like On The Beach (LON:OTB) has reduced marketing spend in absolute terms over the last 19 week period, but it wouldn't surprise me if for the year as a whole the trend of the last few years remains intact, i.e. increased or similar marketing spend in absolute terms but lower spend in relative terms.

What I found more interesting in today's announcement is what looks to me like an anomaly between what they said about demand and marketing spend at the last interims and what they said today.

When the interims were issued on 10 May they said this:

In light of our expectation of a strong recovery in demand we have continued to invest in both online and offline marketing activity to build trading momentum into the start of H2.

and today they said this:

...weaker demand has driven a significant reduction in the Group's marketing spend

Zipmanpeter

RE: VLG : I think the recent placing (see Aug 7 2018 RNS) at placing of 40p for a net £17.5Mn to i) fund acquistion of Dentyl £4.2Mn (2nd mouthwash brand to Ultradex) ii) pay off £3.7Mn of (director) loans and give combined with this update are very positive indeed. Future is brighter than current numbers show.

1. The marginal profitability of extra mouthwash sales is likely to be very high indeed. So assuming the extra UK listings work out on UltraDex plus help support the (re-)introduction Dentyl to a wider distribution, we can think of PBT of Mouthwash going from say 0.6(Dentex 2017) +1.2(Dentyl 2017) = 1.8Mn PBT to say 1.6 +1.7 = 3.3Mn + sachets 0.3Mn = 3.6Mn. This compares to 0.6Mn for UltraDex alone last year.

Both brands bring distinctive benefits/propositions to the category in the UK and are always going to be niche segments but are probably sustainable and growing with some love and effective targetted marketing.

The extra Euro/ROW sales on mouthwash will probably generate a benefit big enough to pay launch costs in first 1-3 years since I doubt there will be big TV supported marketing plan any launch but growing from current 10 markets to 15 (Q1 19) and 30 promised by 2020 will be a big increases in scale and probably permit the profitable in sourcing of mouthwash production already owned Italian manufacturing site. Euro/dollar-sales also provide some more natural currency hedging (plus again help in manufacturing efficiencies). A useful additional benefit given brexit risk to pound

Overall, the extra sales will also help spread fixed OH since very limited additional staff required given manufacturing already set up with account handlers in UK in place and distributors used in overseas mkts.

2. Financial savings from less interest costs (est at 0.3Mn pa) plus the elimination of the bonds/loans cleans up the balance sheet to look better as well as be stronger. Balance sheet on Stockopedoia will not update to reflect this until interim results in Sept

3. As Graham says, the residual 10mn provides for extra acquisitions or to fund marketing to drive sales faster (or resilience if all goes to pot for a period!).

The shares IPO'd in 2014 at 100p so at 48p are half the price with the business much better defined. Each year there has been a positive strategic move. I think it worth opening a position. Risk is now move of it moving sideways than falling sharply (famous last words!). Looking to buy.

Vsihv

No expertise in marketing but could it be that they invested in marketing (i.e willing to pay a lot for the word beach), but then low demand met the customer did not click so therefore they spent less on clicks than anticipated??
Would explain the cost/revenue remaining constant from 2017 but the absolute amount being lower???

At the risk of overcomplicating, OTB will almost certainly be bidding on '000s of search terms. When you cut back your spend a typical result might be to fall from first or second in the search results to a lower position - generating less click-throughs. Many of those people who didn't click might have been early in the holiday planning process, which is why their absence doesn't become apparent until much later.

HTH, no position.

Paul Scott

Hi,

My favourite line in today's SCVR about £7DIG

It has been unprofitable for almost the entirety of the 21st century ...

Love it! I like the way you manage to be scathing about lousy companies, whilst still sounding very polite (I never quite mastered that, lol)

Best wishes, Paul.

shipoffrogs

I liked this one:

"Our resident expert on Ashley House, "drvodkaquickstep" (not his real name) has penned some analysis ..."

GrahamF

What does On The Beach do that other websites like Expedia do not?

Thank you Sir!

Graham Nearly Jacob Rees Mogg!

GrindertraderUK

A valuable lesson from Graham is the skill to read in between the lines. Something many of us (me including) at times forget.

The CEO says "the Board remains committed to being profitable at PBT level during the second half of 2018" - i.e. we will probably have a full-year loss. This is a downgrading of expectations compared to what the Chairman promised in February.

AlanJenkins2

I've tried Dentyl. Its major selling point is that it is PH neutral.The trouble with that is that it doesn't really make your mouth feel fresh in the way that most flouride mouthwashes do. I'm guessing that that may be an inevitable downside of it being PH neutral [neither acid nor alkaline].

17th Aug '18

Thanks for the insight. UltraDEX also doesn't leave you with the buzzed up feeling of Listerine and others. G

peterthegreat

Yes I found exactly the same disadvantage with Dentyl, it doesn't make your mouth feel fresh so that is why I did not buy it again and perhaps why its previous owner wanted to sell the brand.

simoan

"...so that is why I did not buy it again and perhaps why its previous owner wanted to sell the brand."

Crikey... better not tell Diageo that I've stopped drinking Guinness!! :-)

All the best, Si

mercury61

20th Aug '18

For accuracy; pH and fluoride.

Carey Blunt

23rd Aug '18

I’ve been wondering for some while why I can’t find dental ph in any of the supermarkets any more. We had taken to stockpiling some of it on the basis we thought it was being phased out.

The idea of it is that when you use it no spit out the mouthwash you can supposedly see the stuff it’s cleared out of your teeth. To me that seems like a gimic but to some people (my wife) that’s apparently a good thing.

Given its almost impossible to buy the stuff at the moment, getting it to turn around shouldn’t be that difficult....just get some super markets to stock the stuff again!

Small Cap Value Report (Thur 16 August 2018) - VLG, OTB, 7DIG, RNK, ASH, FTC, TRB

Venture Life (LON:VLG)

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Graham Neary

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