Small Cap Value Report (Thur 23 Jan 2020) - CMCX, G4M, KETL, ECSC, MTC, ANCR

23rd Jan '20 by Graham Neary

56 comments 9215 reads

Morning folks!

There's a huge quantity of updates out today.

Final list:

CMC Markets (LON:CMCX)
Gear4Music (LON:G4M)
Strix (LON:KETL)
ECSC (LON:ECSC)
Mothercare (LON:MTC)

Timings: finished at 4.30pm.

CMC Markets (LON:CMCX)

Share price: 160.6p (unch.)
No. of shares: 289 million
Market cap: £464 million

Q3 Trading Update

I'm experiencing some regret this morning, when I see that that the share price for CFD provider CMC has nearly doubled since I sold out of it last August.

At least CMC was only ever a tiny shareholding. I've maintained a larger position (currently 8% of the portfolio) in the lower-risk IG Group (LON:IGG), which has also been performing well - although not nearly as well as CMC, in recent months.

CMC issued a blow-out interim report in November - net revenue increased from £63 million to £85 million. Thanks to operational leverage, this translates to a big percentage increase in the bottom line!

Digging into the presentation slides for that report, we learned that the company was using technology "to make better informed hedging decisions".

It admitted that it was hedging less frequently, and I was left with a question mark hanging over whether CMC was as safe as it was before, or whether it was moving into risky territory (the sort of territory which Plus500 (LON:PLUS) inhabits).

It would be surprising if CMC has started to act irresponsibly - in their next annual report, I'd like to see a clear statement regarding how much market risk they are exposed to, i.e. what percentage of total client trades is hedged (internally or externally), and what is the percentage of residual exposure.

Update

Today's update implies that hedging costs and hedging losses continue to reduce in Q3, having already reduced dramatically in H1:

Net operating income continued to outperform expectations in Q3 2020. The strong performance was driven by higher retention of client income in comparison to H1 2020.

Also worth noting:

This resulted in higher revenue per active client despite lower client income due to the…

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Paul Burkitt

23rd Jan '20

I bought into Hotel Choc before Xmas. During Xmas with family - everybody who have bought chocolates as presents had chosen HC, rather than Thorntons or M&S. The universal view was that their chocolates were delicious! Their Vetvetiser subscription service looks like it is also a real winner.

I agree about the supply issues - but they do need to sort out.

I also like their website

patrick00

Another vote for Craneware (LON:CRW) if you can Graham please

bryans1311

I'm probably in a minority (along with my close circle) in that we don't particularly like Hotel Chocolat (LON:HOTC) chocolate. The branding and packaging is outstanding, as well as some of the "added flavours", but the chocolate itself is a bit tasteless and plastic. It's still much better than modern-day Throntons or palm-oil filled Cadbury, but I would much rather someone bought be some Lindt, Godiva or M&S chocolate!

garbetklb

I looked at Hotel Chocolat a couple of years ago, but was put off by the level of poor reviews on Trustpilot etc, especially regarding their internet offering.

Just looked at Trustpilot again and there are plenty of v recent reviews bemoaning how poor their ordering process is - rather bizarrely, there are several replies from HC saying "We completely understand and wholeheartedly agree"! Checking, this now seems to be a fairly standard response - a little bit further back, a standard response seemed to be "I have passed this on to our web team who work very hard at making the site more user-friendly".

An e-commerce website ain't rocket science and for a company like HC the fact that they can't master this over several years make them uninvestable for me.

davidjhill

actually on Sosandar (LON:SOS) I think it's more around liquidity. Usually about £80k worth of stock changes hands a day. Doesn't take many sellers to move the needle, or buyers for that matter. Often with smaller stocks people buy in on anticipated news flow gradually over a few weeks but sell out in a cluster for a few days after. The Market makers are the main winners out of that but the volumes are small. This is a £30m company and the selling has all been done on 5m of shares traded = £1.3m of value. so a 3% share turnover moves the value of the business by 30%. Classic illiquidity.

It's a hard stock to value as it remains loss making so it also isn't anchored anywhere. The UK market is rubbish in comparison to the US at understanding and valuing these type of fast growth, unprofitable businesses. More often its done as a price to sales. At an expect £20m revenue for the coming year a 1.5* revenue multiple. I suspect a private equity house would value at double or treble that or poss even more but therein lies the problem. Private investors in the UK want access to these big potential growth stocks BUT they want to value them on a growth/value perspective and the two don't compute! The US doesn't have that problem. A PE or VC house would invest in the business to accelerate growth as much as possible, raising funds at higher valuations. The small UK listed market runs a mile at the first sniff of that strategy. Placing = discount = reason to sell = share price fall.

Sosandar (LON:SOS) has only really put one foot wrong in its trajectory so far in my opinion and that was not raising enough at the outset and more aggressively growing subscribers........but that's in hindsight. Now they are moving ahead with that strategy, having tested the impact and seeing a direct correlation between their advertising and recruiting new but repeat customers. As a consequence Mr Mainwaring is currently busy panicking that they might decide to raise money to grow and is selling out fast. Looking at the house broker research seems to suggest that b/e on the higher spend is achieved this year and the company remains in net cash, so no placing needed. That doesn't mean there won't be one of course and that uncertainty alone causes downward pressure.

I go back to my first point : we want these companies to be listed so we can participate in their success and not just give all the gains to the PE houses but only if they can do it on a shoestring, whilst being consistently profitable and presumably tap dancing to the tune of Dads Army....................

Henry Walpole

Mark - UK listed (but Israel based) small cap Ethernity Networks (LON:ENET) is involved in the 5G space. I hold.

fwyburd

Excellent summary on Sosandar (LON:SOS) David, spot on.

I'm heavily invested in a 7 year old tech startup that is now VC backed and has raised over £60m so far and never made a profit. The CEO is actively seeking more US investors for the simple reason that they understand the big, long-term picture far better than UK/European VC's or Angels. I do expect to exit at some point in the next 5 years but until then, I'm happy to hold and watch them grow sales at mouthwatering margins and continue to raise money at higher and higher valuations. And the good news is the CEO doesn't have speculators playing havoc with his share price. Which is the problem Sosandar (LON:SOS) currently have...

cheers

Francis

RISK

see Stockos “highly speculative” stock description. Adjust risk accordingly.

Glorenfeld

Re £STRIX Just a note to say that copyright does not protect the same things that patents do! Patents protect technical inventions (like kettle controls) and don't require the owner to prove that the invention was copied when enforcing.

Copyright (as far as it is relevant to Strix) only protects literary works (which includes source code) and design documents, but requires proof of copying. Different regimes in different countries, but currently in the UK, even if you could prove copying, making a controller to a copyrighted design document would not be an infringement of the copyright in the design document.

That is not to say that Strix's copyright can't be useful, but it's certainly not as valuable as their patents. However, Strix are regularly releasing new products and maintain a sizeable patent portfolio. The risk of a "key" patent expiring is real, but with continuing innovation and a PE of 12, it's not my main concern.

(I hold).

davidhowman

STRIX - I looked on the IPO website for news on Patents and gave up ! The Strix website has comments re Patents, cut & paste of some follow;

Successful Patent and IP Protection
May 2018

Strix has a portfolio of intellectual property protecting a variety of product features across its product range. The portfolio includes over 150 patents and Strix relies on these and, where they have expired, other IP and unfair competition law to take legal action, both to defend the Company's commercial position and ensure consumer safety. Examples of action taken in the last six months in China and Europe include:

As detailed in the recent Preliminary Results announcement, the China domestic market has seen an increase in electronic multi-cooker appliances and Strix will launch a revised control in H2 2018 to secure a share of this growth opportunity whilst continuing to defend its existing patented technology. Against this background, Strix brought patent infringement claims against 19 appliances sold by Bears Electric Appliances Co., Ltd to the Shanghai IP Court which was successfully settled as set out below.
In an example highlighting the different ways the Company can protect its position concerning its older products, Strix brought a claim based on copyright law against Adriaanse Import & Export B.V. and Edco Eindhoven B.V. who had imported kettles into the Netherlands which, according to Strix, incorporated copies of its controls and connectors. The parties subsequently settled matters as set out below.
Strix continues to monitor growing internet product sales and takes action where appropriate. The Company recently brought complaints of electronic kettle patent infringement to the attention of Amazon which swiftly resulted in five webpages being removed from their platforms across Europe. One vendor, Kinden, settled with Strix as set out below, agreed to replace the alleged infringing electronic kettle control with a Strix product and has since been re-listed.

Mark Bartlett, Chief Executive Officer, commented:

"We take protecting our innovative technology and superior products very seriously, ensuring that customers can continue to trust and rely on products using Strix technology.

"We continually monitor appliances in the market to prevent the sale of products that do not meet international standards or that infringe our IP. We will continue to take further action, as appropriate, reinforcing our market leading brand and ensuring that consumers can benefit from safe, high quality products."

IP News
August 2016

On April 29, 2016, Strix filed an action against a U.S. based supplier of electric kettles fitted with connectors made in China and branded ‘Liang Ji’ in the United States District Court for the Central District of California. In its complaint, Strix accused the supplier of infringing one or more claims of U.S. Patent No. 5,971,810 (“’810 patent”). Strix and the supplier have resolved their respective claims and defenses with a settlement agreement, the terms of which are confidential. Under this agreement, the supplier has paid Strix a settlement fee and promised to cease sale of cordless electric water kettles through expiration of the ‘810 patent.

How long the Patents last I didn't find out but at least they pursue breaches.

GInvestor

At some point, with a bit more global warming they might even be true to their slogan "British Cacao Grower". What would we know about growing cacao anyway? Now potatoes and oats, absolutely! Sorry but I cannot invest with such flagrant misrepresentation, even if this only fools, fools. Website OK, but agree it just needs to work.

Jamboreebop

Strix (LON:KETL)

If you want to look up patents the best place is the Espacenet website.

Searching for 'STRIX' https://worldwide.espacenet.co... brings up 317 entries. The most recent in August 2019 (gesture-controlled heating apparatus...I usually just shout at my kettle to get it to boil faster). All the patents can be viewed for those that feel inclined.

A patent usually lasts for 20 years from filing date.

InvestorJohn

£mte

Mti Wireless Edge (LON:MWE) say they will benefit

MiserableJacktPotato

I've not looked at ECSC (LON:ECSC) business model at all, but I don't see why this would necessarily need to be people intensive, certainly no more than any other IT outsourcer.

You buy and configure the anti-malware platform of your choice, then you set up an operations centre monitoring for signs of infection and deal with them - the anti-malware platform should do all the hard work for you. You just provide specialists to clean up anything that gets through. Modern anti-malware should block anything that looks funky at first sight (if configured properly). Employing dedicated security professionals is expensive for small organisations and local government - makes sense to pool resources.

Modern cloud based platforms let you authenticate across domains so you can have limited dashboards monitoring a lot of devices.

Disclosure: I would go into more details but I work for one of the providers and don't want to appear to be pushing our product. No position :)

Julianh

Really informative analysis David. Thank you.

Clearly this not an everyman investment - a Paul Scott investment but not a Graham Neary investment. Stocko's computers rightly dislike it because there is no history of profits or positive cashflow. So those of us who want to be in on the ground floor on a (hopefully) successful startup need to evaluate the qualitative information - the quality of the management, the quality of the product, the strategy and how well they are executing it. These are not factors which Stocko's computers can evaluate. Most loss making startups fail, losing money for investors in the process. One completely valid investment style is to ignore startups completely and focus on investing in sound businesses with a track record of profits, cashflow and good returns on equity. Or we can try to sift the gold from the chaff and buy into good management and good business models that have a decent chance of making it through to strong profitability.

We will need to watch Sosandar (LON:SOS) over a few years (not a few days) to find out if this company is going to be one of those

Thanks - yes, it is like most things, a balance. The benefit a VC or PE house has is that they will have a portfolio of unlisted companies, access to management, accounts, sales statistics and possibly a board seat. Certainly they can influence direction. Private investors do not. Even then the VC/PE does not expect every investment to pay off. They expect maybe 10% to blow the lights out, 40% to do ok, 30% to lose a bit and 20% to go bust. The 10% pays for everything else and beyond. Therefore investing in a single stock of this type for a PI is inevitably more risky as there is little by way of portfolio effect. These are not stocks in my opinion that we should lump in with our main portfolios as they don't behave the same and are not valued the same, but there can be room in a well constructed portfolio for them. The bigger problem for me is that AIM feels like the wrong place for them as everyone is persistently scared of raising money, which is ironic.

Other than list in the US I don't know what the answer is but that in this instance it is unlikely to work for a UK online retailer anyway given the demographic.

Tombholliday

Bit silly to finish the review of Gear4Music worrying about it chasing sales over profits when today’s update demonstrated the opposite?

Gnome2

24th Jan '20

Tombholliday,

I think Graham is referring to the Analyst’s valuation method which is based on sales rather than profit. He’s already acknowledged that the focus on margins is a move in the right direction.

mickvz

Thanks for the update, does raise the question re Strix (LON:KETL) as to how us mere mortals would be able to establish, through research or investigation, durations of patents etc that clearly influence intrinsic underlying value of an entity.

ps, not sure the £ticker action seems to work from my android phone...

Small Cap Value Report (Thur 23 Jan 2020) - CMCX, G4M, KETL, ECSC, MTC, ANCR

CMC Markets (LON:CMCX)

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About the Author

Graham Neary

56 comments

Successful Patent and IP Protection
May 2018

IP News
August 2016

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Unlock the metrics for all these stocks and more...

Small Cap Value Report (Thur 23 Jan 2020) - CMCX, G4M, KETL, ECSC, MTC, ANCR

CMC Markets (LON:CMCX)

Unlock the rest of this article with a 14 day trial

About the Author

Graham Neary

56 comments

Successful Patent and IP ProtectionMay 2018

IP NewsAugust 2016

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...

Successful Patent and IP Protection
May 2018

IP News
August 2016