Small Cap Value Report (Thur 19 July 2018) - RDL, JIM, GOAL, SPE, SIS, DOTD, NICL
Good morning!
Many stocks I'm interested in have reported today.
- Jarvis Securities (LON:JIM)
- Goals Soccer Centres (LON:GOAL)
- Sopheon (LON:SPE)
- Science in Sport (LON:SIS)
- dotDigital (LON:DOTD)
- Nichols (LON:NICL)
1.15pm: Scholium (LON:SCHO) is too small while the AO World (LON:AO.) update is in line with expectations and with an unchanged share price, so I have taken them off the list. Everyman Media (LON:EMAN) also issued an "in line with expectations" update today.
Ranger Direct Lending Fund (LON:RDL) (in which I hold a long position) produced its monthly update yesterday afternoon, showing NAV virtually unchanged at c. $183 million (872p at latest exchange rates, I think), with the assumption of a complete write-down of its bankrupt US investment.
It's a little disappointing to see NAV unchanged, naturally, but it's only one month and it was a turbulent period for the fund. 33 basis points of performance was spent on its management review process, and 17 basis points on legal expenses related to the bankruptcy case in the US.
I'm now looking forward to seeing how much value the new directors can realise. Only one of the original Board members is left.
Jarvis Securities (LON:JIM)
- Share price: 447.5p (-5%)
- No. of shares: 11 million
- Market cap: £49 million
This is a company I know something about, as I have been a client for several years. I also briefly (and unsuccessfully) held the shares. It offers retail stockbroking and outsourced back office services for commercial institutions.
I often refer to it as the Ryanair Holdings (LON:RYA) of the stockbroking world. It's a no-frills experience, but it does work. I've never had any problems with customer service. And you'll struggle to find a cheaper service out there, with no management charges.
It's an exceptionally efficient operation, achieving mammoth returns on capital every year for shareholders, including for the founder-CEO whose family owns most of the company.
Jarvis is a good example of a company which sticks to its knitting. It knows what it does well, and it keeps doing it.
It has never had any need to build an empire with a buy-and-build strategy. Instead, it has simply made sure that its core business keeps running smoothly, and paid out nice dividends to shareholders.
It also offers the interest rate hedge which I think investors should crave: it would benefit greatly from higher interest rates, as its earnings on cash under administration would soar.
With that preamble out of the way, let's take a look at these results.
Interims
Regulatory changes, primarily associated with the EU's MIFID II directive, have increased costs and reduced margins in relation to Jarvis' commercial activities. It has therefore had to raise its prices, and says "margins have now been restored" as a result. Sounds ok.
In relation to the cash under administration, the chairman says "we are beginning to achieve a higher average interest rate on these funds" - very good!
I'm a bit of a pessimist in relation to the UK interest rate outlook. The US Federal Reserve is being far braver when it comes to bringing interest rates back to a reasonable level (and that's one of the reasons I've been investing in US debt funds). Gains in interest income at Jarvis will depend on how brave the Bank of England can be in following suit.
The numbers
Revenues are down slightly, but are effectively unchanged.
The major change is that administrative expenses have increased by more than 10%.
Apart from that, it's the standard result this company achieves: huge margins, huge returns on capital, and fantastic free cash flow generation (excluding a negative working capital movement).
If I did have one concern about this stock, it would be that I think the trading platform could do with a little more investment. It has looked the same for many years and with some new competitors popping up who are innovative and extremely well-invested (such as IG Group (LON:IGG), in which I hold a long position), I think opening the purse to improve the platform could be a wise move.
Fortunately, Jarvis has the underlying cash generation to afford to make this investment, when it chooses to do so.
With top-line growth having slowed down, I can see why its P/E multiple has compressed. I'd be interested to open a position in it again at some point, so will be keeping an eye on it.
Goals Soccer Centres (LON:GOAL)
- Share price: 67.5p (-22%)
- No. of shares: 75 million
- Market cap: £51 million
A double-barrelled update from Goals today. In a separate announcement, the CFO has resigned. He will stay with Goals until his successor has started.
This company operates soccer pitches for 5-a-side matches. I tend to view it as a capital-intensive business without much of an economic moat, and this is born out by a return on capital figure of 6.5% (using Stocko figures).
Key points from today's update:
- Poor weather has resulted in like-for-like sales down 3%.
- 73% of the estate will have been modernised by the autumn
- Lenders have agreed to relax the net debt / EBITDA covenant for the June and September tests.
- Full-year results to be materially below expectations, due to the poor weather in H1.
My view
Whenever there is talk about covenants being temporarily relaxed, investors need to be worried.
I've opened up the final results statement again, and I see that Goals was carrying net debt of £30 million, with net debt/EBITDA at 2.97x.
This was set to reduce with the help of a company policy to restrict capex "to essential items only."
However, given that the covenant with the lender is being relaxed to 3.25x, it has evidently not reduced by much, if at all.
I do find it a bit strange the company has been modernising the estate after promising to restrict capex to essential items only. The modernisation spend must be considered essential in order to stay in business?
I wouldn't be interested to invest here unless it looked extremely cheap, and even then the debt covenant issues would be a worry.
Sopheon (LON:SPE)
- Share price: 910p (+20%)
- No. of shares: 10 million
- Market cap: £92 million
I last covered this software company in January, when it said the 2017 result was going to be significantly ahead of expectations. The share price was 575p at the time.
Today, the company reports that is trading "comfortably in line with expectations".
That says to me that it is trading at least in line with expectations.
It has a track record of beating expectations, and this says to me that it might perhaps be in the habit of setting expectations at a conservative level.
Net cash has grown by $6 million to $15.5 million.
Paid-for research pegs full-year revenue at $30.1 million, and says that today's update is "very supportive" of this estimate. Last year's revenue was $28.5 million.
My view : the 20% share price gain this morning looks on the high side to me, given that analysts are leaving their estimates unchanged.
I can only assume that shareholders are pricing in yet another revenue and earnings beat for the full year, and I would agree that this is the most likely outcome, though it is not guaranteed.
It's a High Flyer (strong quality and momentum). High flyers tend to outperform:
Congratulations to anyone who has been holding this, as its performance has been spectacular.
I don't have any great insights into its products, but I suspect that its trading momentum is sufficient to justify its high rating. So I wouldn't necessarily be put off by the high P/E multiple. Assuming that we get another couple of years of growth at similar rates, it will be able to justify this.
Science in Sport (LON:SIS)
- Share price: 75.5p (unch.)
- No. of shares: 68 million
- Market cap: £51 million
This is an unprofitable sports nutrition business. It makes powders and gels for cyclists and other athletes.
I've been watching it for a few years, looking forward to the day that it turns the corner into profitability and perhaps gets taken over at generous price to sales multiple by a multinational.
This H1 update tells us that sales are up 20% year-on-year to £9.9 million.
UK retail was the weak point, down 3%, but everything else was good. Online sales grew 25% and international sales grew 53%.
The Board remains confident in its outlookfor the full year.
My view: The main issue with this stock has been that its overhead and marketing budgets have been so huge, relative to the size of the company. Share-based payments have also been surprisingly large. Its losses have been growing even as its sales have been growing.
The consequence of running down its cash balance has been dilution, and it only took about two years for the share count to increase from 40 million to its current level.
So we haven't got much evidence yet that this is going to work out well for shareholders.
The gross margin is pretty good, at 60%. I'd like to think that it could eventually reach a level of brand recognition and repeat business such that sales volumes were sufficient to cover its costs.
It had cash of £16.6 million at December 2017. That should be enough to last for at least a couple of years.
dotDigital (LON:DOTD)
- Share price: 85.5p (+17%)
- No. of shares: 297 million
- Market cap: £254 million
Paul has covered this one multiple times, most recently in February. It calls itself "a leading omnichannel marketing automation platform".
Its core product is Dotmailer (link), which has a testimonial on its website describing it as "like Mailchimp on steroids".
Running my own newsletter as I do, I know a thing or two about Mailchimp.
Mailchimp have never charged me a penny, because I don't send enough emails per month to cross over into their paid plans.
But I love the service. It's very easy to use, it has a clean appearance, and it has never let me down.
If I do cross over into the Mailchimp paid plans, I won't mind. Mailchimp has supported me virtually from day one, and never billed me, so I won't mind paying them some fees in the future.
Dotmailer is catering to a differing market. It doesn't offer a free service, and its pricing looks very expensive compared to Mailchimp - several times more expensive.
While 72% of Mailchimp's user are small businesses, only 40% of Dotmailer's customers fall into that category. (source)
So I'm getting the impression that Dotmailer is really a deluxe version of Mailchimp.
The overall Dotdigital group is showing excellent growth with this strategy. Key highlights from today's full-year update:
- revenues +35% to £43 million
- profit in line with expectations
- cash ahead of expectations
- recurring revenue +41%
- "no material impact" from GDPR on existing clients
It has strong partnerships with Microsoft and a range of eCommerce platform. Perhaps this is part of the value-add which enables it to charge its clients so much?
Outlook - in line with expectations.
My view - it's a really impressive story. Again, I'm not sure if I can get behind a 17% share price increase from a trading update which is merely in line with expectations (apart from the cash balance, which was ahead of expectations). I suppose this could be relief that GDPR hasn't caused any harm.
It's another High Flyer and I have a bit more confidence that this one can justify its high rating and its momentum. I have some familiarity with this type of product, and I reckon that the pricing Dotdigital has achieved (average revenue per user of £845/month) is extremely impressive. It must be offering some very useful functionality to justify that sort of pricing.
Nichols (LON:NICL)
- Share price: 1485p (unch.)
- No. of shares: 37 million
- Market cap: £549 million
Many experienced investors will be familiar with this soft drinks company. It is home to the Vimto brand as well as Levi Roots, Sunkist and others.
These H1 results show a modest improvement in revenues and profits. Performance is described as "solid".
Vimto is going from strength to strength in the UK, where its sales have jumped by 13%. I get the impression that this is a really strong brand which also benefits from the nostalgia of older generations.
International sales were significantly lower, down by 30%, due to conflict in the Middle East. So that's why the overall result is somewhat muted.
Dividend - up 12%, reflecting confidence.
Outlook - in line with expectations.
My view - there is no change in my overall view of this stock. A fine business and a worthy candidate for a long-term buy and hold.
Indeed, if I was shopping for new equities right now, I would be tempted to add a starter position in Nichols to my portfolio. In recent years, it has rarely traded at a P/E ratio of less than 20x and has often traded at a much higher level than that. It is currently at a forward multiple of 21x.
I've run out of time for today, but I covered most of what I originally intended to. Cheers!
Graham
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38 comments
Colleagues I sit next to at work who use dotmailer dotDigital (LON:DOTD) say it is far superior to anything else available on the market. In particular it has a really clean interface, allows detailed data about user click-throughs and open-rates, and integrates with their email address database. I am not sure mailchimp does that last bit.
They also said to me that they would have thought dotDigital (LON:DOTD) revenue would go up in the short-term with GDPR given the number of emails that had to go out about GDPR! So perhaps any negative effect of that legislation (of fewer emails therefore lower revenues) might not be felt until later in the year.
Harvey Nash (LON:HVN) – I wonder has anyone else been stopped out of Harvey Nash (LON:HVN) today, seems to be a flash 9% drop in the middle of the day today that sadly hit my stop *only just mind you* rather annoyed as its just about regained most of those losses by the close.
This is becoming to be regularly thing for me being stopped out on these flash drops in general, I wondering if this is the nature to stocks that I buy. None the less I’m still miffed as I cannot find any news to warrant this drop today and chances I’ll be buying back in as I still hold strong convictions for stock. Anyone know of a reason?
All the best, CID
hi cidunn,
out of interest, what platform are you using for your positions, is it the actual equity holding or a spreadbet?
cidunn I think it is just a little bit of a risk of holding shares. On my previous platform (TD Direct) I used automated stops for years. I was then very frustrated when lots of them were hit unexpectedly and to then recover, like you've seen. Through these automated stop losses my holdings in such as Avon Rubber, Diploma and more were closed out only for me to see the shares then go on and mutli-bag.
Thankfully when it happened with 4imprint I went back in a week or so later and thankfully I did since this is the share I have the best % return on, 700%+ and counting.
Now I don't use automated stops. I assess the fundamentals of shares, try to understand why the price is going down and if I think the negatives are temporary or long term. All my trades are manual now. Yes this requires discipline but my returns are better than ever and I have less trading activity.
I noticed yesterday that my local 5 a side Goals had invested in all new chairs for the bar area. Strange investment if they are really struggling?
G,
Thank you for the report, always fantastic.
I know its late in the day for a request, but AXS, accsys technologies, is one that i'm sure many readers hold/follow.
Its not a trading update, but a notifiable interest caused a big move and I'd be interested if you had any comments to make.
All the best,
J
Hi John, glad you like the report. I haven't got any current insight into Accsys Technologies (LON:AXS), I'm afraid. That's a very big move today though - I see what you mean! G
#DOTD
Graham, I think today's rise is because the share price had fallen 30% recently on no news over worries about the impact of GDPR on its earnings. It's projection for EPR growth in 2019 is also impressive. Today, the share price is still almost 20% off its highs.
I think you catch the magic of Jarvis very well. It operates a low cost model and appears to be doing that very well. I use it as a share portal as well and while an upgrade is possible I still find the no frills version very attractive. Recent pricefall seems a bit over egged
Hi Bobo,
Are Jarvis at risk from clients moving to the larger providers such as HL, after the beaufort securities situation where if a small broker goes bust the rip off KPMG types will take fees out of client money. Client may not be moving but the market may be pricing this in?
re Jarvis Securities (LON:JIM) and impact of the Beaufort Securities scandal
Hi John652
I also fear the impact of events such as the Beaufort Securities scandal. But I like the XO (Jarvis) interface, and low costs.
My solution is to split my portfolio across three brokers and two accounts at each (mine and my wife). This has the impact of a) spreading the risk, b) reducing exposure to potential losses such that hopefully my "share" of any loss might be below the FCA £50K compensation limit.
I suspect I am not alone in this type of strategy, and those investors who are aware of the Beaufort Securities scandal are the type of investor who are most likely to mitigate risks in this way. If so then Jarvis may benefit from more accounts (as people double up on accounts held) but have lower balances in each account, so maybe netting about the same.
Also Jarvis offer a white label service to other brokers, which might dilute the impact.
(long on Jarvis Securities (LON:JIM) albeit a modest amount and a customer)
Graham, thank you very much for the update on SPE (I am lucky holder).
I have a follow up question which relates to high flyers more generally. When do you hold a high flyer, how do you decide at what point to sell it and cash in the profits before it runs out of steam? I have made this mistake with RMG, which has performed very well up to March, but lost most of its gains since then (at least it pays a generous dividend which softens the blow).
A good question which I too would pose. I have been a holder in SPE for some time and in good profits, but sadly sold yesterday!! Oh how I am kicking myself today, but had assumed following the recent drops that the results would not meet expectations!
Back to the Crystal Ball, methinks!
My answer based on making many errors is that the least bad thing to do is to wait for the actual results and make buy / hold / sell decisions on the facts, ignoring the market noise as much as possible.
I’m not a great believer in the mystic power of markets, but I do use manually set tracking stop losses. You can always buy back in. One of my bigger behavioural errors in the past was to think that having sold once I was somehow barred from buying back in.
Thanks, John. So you would basically just hold a high flyer until one day you get a profit warning and it drops? You would never try to pre-empt that by looking at some fundamentals and deciding its become too expensive?
Hi Grishas,
I think Graham makes the important point that we need methods that work for our individual personalities, circumstances, and objectives. Knowing when to sell is harder than buying.
One of my weaknesses is impatience and I’ve missed out in the past by not letting winners run. So yes these days I tend to hold until they disappoint rather than second guess.
Hi grishas, personally I am very resistant to selling stocks, and I only sell my successful companies if there is something else I really want to invest in and need the funds for. Or if it ends up being 25% of my portfolio or something like that, I will take some off the table. You may find that a different strategy works for you. G
Re Jarvis Securities (LON:JIM) my guesstimate of 30 Jun client cash under admin is £229m. I get that by going back to 1H13 results and rolling forward by the published KPI "Growth in cash under administration" at the half year stage. The 5 yr CAGR for growth in cash under administration is 16.1%.
I think the uptick in interest margin is possibly linked to the government finally ending the Funding For Lending (in Feb I think) scheme which destroyed the savings market and caused banks not to compete for deposits since they could borrow unlimited amounts from the government at the BOE base rate.
If interest rate margin and cash under admin both move up in tandem, it could create a nice uplift in a 100% margin revenue stream. At a minimum, it should grow at the rate of growth of cash under admin after five years of muted growth due to interest rate compression.
It's worth monitoring the quarterly updates from Share (LON:SHRE) for their inclusion of Compeer industry data. New industry participants (eg AJ Bell, HL, JIM) have been added which mean the data measures a much larger part of the market than it used to. Share's Q1 update said for the Compeer group "trading volumes decreased by 4% and dealing commission declined by 7%."
Graham N. Re Jarvis Securities (LON:JIM) edit:
"Revenues are down slightly, but are effectively unchanged."
Thanks.... I do all my own editing so I need to be corrected for issues like that! G
For those interested I’ve done a series of tweets on my views of Versarien (LON:VRS) preliminary full year results starting here https://twitter.com/mikewbrenner/status/1019834883462582272?s=21
re dotDigital (LON:DOTD), presumably part of the (expected) revenue increase is down to the Comapi acquisition. Still, it was for cash, so the buy looks fully justified.
3rd dotDigital (LON:DOTD) please - I has small spread bet.
Good Morning Graham!
Sopheon (LON:SPE) has put out an interesting trading update with numbers. They are trading in line with expectations & the board note: "With this progress, we expect revenue, EBITDA and profit before tax for the first half of 2018 to be significantly ahead of prior year performance for the corresponding period".
Frontier Developments (LON:FDEV) also announce they have sold more than 1 million units of Jurassic World: Evolution. You can see a detailed post about Frontier Developments (LON:FDEV) here: https://www.stockopedia.com/content/small-cap-value-report-tue-3-july-2018-fdev-mcb-chrt-rm-379299/?comment=22#22
We could assume 3 x price points for sales of the 1 Million so far: Low: £32; Middle: £35; High: £38. Remember platforms will take a cut (e.g. Steam take 30%). We also know Planet Coaster & Frontier are 'ahead' and Liberium are suggesting £24M estimate for them both. Note that a large expansion, Elite Dangerous: Beyond - Chapter 2, is released 28th June.
Thanks,
IG
Disclosure: I hold long positions in both.
Minor point (and not wishing to be pedantic, just helpful!) but most platforms, including Steam, take 30%, not 20%.
You're right - 30% is correct. I've edited my post.
The rights holders will be taking a bite of the Jurassic World sales as well - I have no idea how much.
I'd second Jon's request for a look at Jarvis Securities (LON:JIM).
Hi Graham
Might you consider looking at the interims of Jarvis Securities (LON:JIM)
I don’t hold but as a user of X-O I take an interest.
You covered them in Feb when they reported a 21% PBT increase. For 2018 H1 PBT has decreased almost 12%.
I’d be keen to hear your thoughts.
Thanks
Jon
Hi Jon, re: Jarvis Securities (LON:JIM), that's done. Cheers. G
dotDigital (LON:DOTD) please. Numbers look fine, although the FY18 revenue number is below what I see expected on Stockopedia. Reassuringly, company saying that EMEA has seen no negative effect in email volumes or recurring revenues from existing companies since GDPR implementation to date. Outlook statement is also optimistic.
My morning smallcap tweet: Soccer result shocker for GOAL.
Goals Soccer Centres (LON:GOAL), Allergy Therapeutics (LON:AGY), Green & Smart Holdings (LON:GSH), Be Heard (LON:BHRD), WH Ireland (LON:WHI)
Goals Soccer Centres (GOAL) warns again. FY expected to be materially below market expectations due to the extreme weather in H1. H1 rev £16.1m (2017: £16.6m). CFO resigns with immediate effect. Kind words.
Allergy Therapeutics (AGY) Proposed placing & subscription at 26.5p (a 4.5% discount) to raise £10.6m. Needed to expand the planned Phase III PQ Grass Trial, part fund the Acarovac Phase II Trial and continue to progress its diversified pipeline.
Green & Smart Holdings (GSH) raises £3.2m via subscription by Serba Dinamik International Ltd at 6.19p, a 6% discount.
Be Heard Group (BHRD) warns FY adjusted EBITDA £3.0m to £3.3m, revenue ~£29.0m. Blames increased costs associated with winning new business, uncertainty around contract timing and client spend volatility. Lame excuses. Cutting costs.
W.H. Ireland Group (WHI) CEO resigns, steps down end July. He is thanked. New CEO will be Phillip Andrew Wale, Head of Fixed Income (Europe) at Cantor Fitzgerald Europe. So WHI sat on the resignation for a while. Being a nomad this is clearly best practice.
Perhaps you could cover Sopheon following their positive trading update today, Graham?
"Comfortably in line with expectations." (" Comfortably," is much more reassuring than "broadly!")
Net cash up from $9.5 in Dec 17 to $15.5 million.
Revenue visibility last month was $23.5million and now $26.5million.
All sounds very positive?
Hi Ken, I agree - comfortably is v. reassuring! Sopheon (LON:SPE) often beats its estimates, and it sounds like it has a good chance of doing this again in the current year. We shall see.
Interesting... 19/07/2018 7:30 AM
TEMPORARY SUSPENSION Hogg Robinson (LON:HRG)
The Financial Conduct Authority ("the FCA") temporarily suspends the
securities set out below from the Official List effective from 19/07/2018 7:30
AM at the request of the company pending an announcement:
Not interesting really, unless you're a Hogg Robinson (LON:HRG) shareholder waiting for your cash:
https://www.investegate.co.uk/...
timarr
Isn’t this the American Express takeover completing at Hogg Robinson?
Small cap, high flyer AIM based in Croydon dotDigital (LON:DOTD) a leading omnichannel marketing automation platform has a trading update today. Highlights include
· Group revenues grew c.35% to £43.1m (2017: £32.0m);
· Adjusted EBITDA(1) and operating profit(2) are expected to be in line with market expectations;
· Strong cash balance at 30 June 2018 of £15.1m which is significantly ahead of consensus even after the acquisition and funding of Comapi for £11.5m (£10.7m acquisition cost). Nice! I hold.