Small Cap Value Report (Thur 28 Feb 2019) - GOCO, FOXT, PHD

28th Feb by Graham Neary

51 comments 11371 reads

Good morning!

I'm afraid I lost internet connection at work for several hours, preventing me from researching and publishing. Sorry about that.

I did manage to do a phone interview with Duke Royalty (LON:DUKE) at 3pm so I'll be publishing that soon.

I'll try to fill out today's report with some more companies:

Gocompare.Com (LON:GOCO)
Foxtons (LON:FOXT)
Proactis Holdings (LON:PHD)

Gocompare.Com (LON:GOCO)

Share price: 65.5p (-6%)
No. of shares: 418 million
Market cap: £274 million

Preliminary Results

(Please note that at the time of publication, I have a long position in GOCO.)

I've been holding this price comparison group since December. Those who've been watching it for a while might remember that ZPG (Zoopla) tried very hard to buy it for 110p in 2017.

Last year, it was reported that private equity groups wanted to take it out at c. 103p.

So I've been feeling quite happy about my sub-70p purchase.

It trades at a single-digit PE, and spends most of its earnings trying to grow the business. It targets a 20%-40% payout ratio, meaning that 60%-80% of earnings are available for reinvestment.

In 2018 (the figures just announced today), GOCO generated £35.5 million of cash from operations.

It ended up spending almost £54 million on investments, mostly on external businesses.

I do much prefer organic growth rather than an aggressive acquisition strategy. In this specific case, however, Gocompare's acquisitions seem highly complementary, and aren't so large as to make me uncomfortable.

GoCompare now owns:

The Global Voucher Group (£36 million price tag), owner of myvouchercodes.co.uk
EnergyLinx (£9 million price tag)

GoCompare is also internally creating:

Weflip, a new automated energy switching service.

Let's consider today's results in some more detail.

Because there are multiple segments, we should consider them separately.

Price comparison

This is the core GoCompare.com, plus Energylinx (acquired in June 2018).

Revenues are down 3% (£5 million), but through careful management of the ad spend to focus only on the most profitable opportunities, distribution costs are down 25% (£12 million).

Because of this, the price comparison "trading profit" is up 11% (£6.6 million).

"Trading profit" could be seen as…

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millen

28th Feb

A little ironic, but wasn't Proactis Holdings (LON:PHD) touted a couple of years ago as a 'better value' competitor to Tungsten (LON:TUNG) which soared then burned around 2015 having fallen well short of hyped-up growth projections? I assume the business models have their differences, but it seems to me that the underlying concept isn't a hugely compelling proposition to companies (or that other competitors have sprung up to eat their lunch).

LovelyLovelyGorgeous

#ARW I have not seen today's presentation. I"think" the results are ok. The tricky bit is that the company need to show what the day to day profits for the business is over the course of the year AND show the extra costs which have been spent and will benefit the company over the longer term.

As a group the shorters are intimidating potential buyers from doing any research since there will be a lot of "they must know something so I am not even going to look any further" attitudes. In the case of this company, we just need to ignore them and wait for the joyous day of the big bear squeeze.

JezWhy

I like the look of GOCO and might have a flutter. I like the concept of the new flipping sites,BUT if I put in my current deal being a regular switcher. Then their annual cost of £1997 a year claims to offer a saving of £263.60 is actually above what I am currently paying per annum if I don't switch i.e. £1867.70. I get the same kind of results with USwitch and I cant believe consumers will be this gullible long term. Uswitch told me the saving was against the standard tariff not what I'm currently paying - isn't that deception??

FREng

RichardK:

The chairman of Dillistone (LON:DSG) is Mike Love, who is also chair at Scisys (LON:SSY) and has always seemed to me to be shrewd and conservative. He clearly believed in GatedTalent before GDPR and there are some signs from the latest RNS that it will make a profit. I have been thinking of buying but lack the conviction to do so yet.

A Baker

Graham, Might I ask that you comment on the results recently announced by Tarsus? A Baker

golfnut59

I have to say. I think the risk reward on GOCO is pretty decent. I love the forward looking and entrepreneurial management team. I think they are well placed to make WeFlip a success. Im very tempted to open a position in this stock.

A Baker

I wrote this yesterday. I'd Wecome Graham's opinion too.

Exhibitions specialist FT money (2 Feb) Tarsus (LON:TRS) published its final results today. They look good (up 9% good outlook, dividend increased, share price up 11% as I write).

TRS is a favourite of Lord Lee. In he wrote that he had bought TRS 37 times since 2015 and it was "now probably second only to Treatt (LON:TET) " in his portfolio.
I'd welcome Graham's view. TRS earns its revenue around the world, a 4% dividend, 4 brokers rate it a strong buy, yet it has negative NTAV, net debt, and a bad Altman Z1 score. Stockopedia ranks it as Balanced Neutral - somewhat remarkably, in my view.

mojomogoz

5c7804d912d35Screen_Shot_2019-02-28_at_1

On Sosandar (LON:SOS)

I don't have a problem with the director options. This company has developed fully whilst listed as opposed to coming from private. If you invest in private companies then you get diluted by mgt being given equity for starting/developing company. The options take them to a reasonable position as incentivised entrepreneurs and founders and not just the next cadre of caretakers of an established company...

...and if they grow from current cash resources with no further equity raises then owning 30% of company seem pretty reasonable. If they need more cash then they should get diluted down with the rest of us.

RichardK

Somero Enterprises Inc $SOM suddenly down 7.5%. Anyone know why?

dscollard

indeed, the total shorts have dropped from 12.5% but the individual positions of the biggest shorters have got bigger in Nov '18 to Feb '19: i.e they appear to not only retain their conviction but to increase their exposure. I'm watching for a volume-driven squeeze but only as a trade.

Bonitabeach

Iamsureyouare

Arrow Global (LON:ARW):
I would love to participate in a bear sqeeze but my memory is too long, and if it looks too good to be true......

thebusinessdesk.com

Different company but too many spooky similarities.

No position

rmillaree

Sosandar (LON:SOS)
purpleski

If the have awarded themselves a further 17% of the company to take it to 42% then this seems excessive.

This is definitely not the case - apologies if i gave that impression with my earlier post.

The announced granting yesterday was only £837K shares out of a total of £20,650 options in total now o/s. The revised total being 17.8%. So if my maths is correct only an increase from 17.1% previously to 17.8% now.

In some respects them having a boatload of options at the time of floating would make complete sense if it kept the other cash costs below what would have been needed. I have looked at the last annual report and its hard to be certain but i have to presume the vast majority are linked to the initial float or reversal or whatever.

It is something i like to keep an eye out on for companies though as it can be something of a free lunch for the directors. I guess we will simply have to wait and see and or ask relevant questions with regard to their policies in this area.

davidjhill

No but anyone else thinking Somero Enterprises Inc (LON:SOM) looks very attractive at these levels?

Volume on drop prior to fall was tiny. 100,000 shares so £300k worth. Then a 1.5m sale came through at 310p so looks like an institution offloading a block at a discount for liquidity.

Recent trading statement said y/e cash would be materially ahead of consensus of $25m so shall we assume $30m?

Revenue and EBIT moderately ahead of expectations - shall we say 10%. So a PE of 10, cash equivalent to 15% of market cap. Fwd yield of 6% and I would say room for a special on the cards.

I bought some more just before close.

Thank you for the selling information, David.

DJCP

Slightly off-topic but may be an interesting read for some:
https://www.bbc.co.uk/sport/football/47386953
"OWNAFC: Non-league football club could be run by supporters using a phone app"

Basically, 2,500 OWNAs (people) have bought shares at £49 each with a view to buy a 6th or 7th tier football club. But unlike a 'normal' investment in a football club (or any company), these OWNAs will use the phone app to make all the decisions in the running of the club - a bit like the Football Manager games, but real-life ! and for the price of a Playstation/Xbox game !

Snoo

1st Mar

Read up a bit more about Gocompare.Com (LON:GOCO) yesterday and the new business.

One problem I have with this is that revenues are derived from the energy suppliers - they pay money per customer that switches.

Why they do this is fairly obvious, they get a customer for a fixed period, and potentially beyond. I would guess a lot of people that switch often forget to switch again once their deal is up. Or alternatively, if they are happy with the service, they won't go elsewhere to save a figure such as £50 a year (i went with Iresa one year, and it was not worth the hassle). That amount is the minimum saving needed to trigger a flip.

Yet with WeFlip, this seems to have no weighting on qualitative grounds, it seems that once you sign up, the switch becomes automatic.

From the point of view of an energy company, they will be acquiring a customer who has no loyalty at all, with no chance to win their custom with good service, as they know they will be off to the next company that offers a cheaper price.

It seems almost certain that these types of customers will have a lower lifetime value to the company, and as such it seems logical that an energy company would not pay as much to acquire these customers.

The whole business model could be made redundant by one or more energy suppliers refusing to pay commissions for a weflip customer (or reducing the value considerably)...which GOCO have no power over.

Happy to be corrected on this.

JamesrWilson1989

Hi Snoo,

You raise some very good points. Before I begin I will state that I am a holder in Gocompare.Com (LON:GOCO) so maybe have some bias.

With WeFlip - they are targeting in-frequent switches to give them a good deal.

According to their research last year, around 20% of households changed energy suppliers. 20% of households have NEVER switched energy. 60% are inbetween the two, will switch one year and then they leave it for a few years then change again. (http://www.gocomparegroup.com/... ) pg 17.

Digging down deeper into the 60% - customers aren't necessarily after the best deal, but instead they are more concerned about not over paying for their energy. So long as they are on a good deal. (The webcast on the investor sector- Q&A at the end of the presentation - CEO mentioned this)

For the energy suppliers now, to attract new customers via comparison websites, they have to be one of the cheapest to have a good chance of attracting customers. The average bill for energy bills in the UK are just over £1,000. So back of a fag packet maths here but, if Weflip only change suppliers when a saving of over £50 can be made, it allows energy suppliers to create upto 5% better margins for themselves.

Obviously Gocompare.Com (LON:GOCO) are at the mercy of energy suppliers. You can argue that their core business of car insurance is in the exact same boat.

As of Sept 2018 - there are 60 active suppliers in the market. (https://www.ofgem.gov.uk/data-... so the de-regulated energy market does play into Gocompare.Com (LON:GOCO) advantage.

pkarnezis

...but it seems to me that the underlying concept isn't a hugely compelling proposition to companies (or that other competitors have sprung up to eat their lunch).

It's the latter (COUP, BAS1V, Tradeshift...). The sector is crowded and ripe for M&As.

Fegger

The problem I have is that MoneySaving Expert has been doing this already for 2 to 3 years and have a lot of people signed up for it already. They have over 3.8 million Cheap Energy Club members. They also leverage their over 10 million MSE subscribers and run deals with energy firms to leverage even cheaper deals. They have just run their 13th deal called the Big Winter Energy Switch. They also mail you when your deal becomes uncompetitive. For myself I prefer to be with MoneySavingExpert as I am more confident they will make recommendations unrelated to commercial terms with them as they are pretty upfront about this.And the deals they leverage seem to be worthwhile. And they have the Martin Lewis trust factor also

All very good points Fegger.

I would counter in saying that WeFlip aren't targeting financial savvy people. With all the press out there saying switch energy, lock in to tariffs etc, only 19% of households have swtiched deals in the last year.

In comparison, Ofgem published a report (albeit in Sept 2017 so might be a little bit out of date) that states 57% people, who are with the largest 10 suppliers, are an on standard tariff deal. To put that in context. 5.3M household changed suppliers last year compared to 13M households who are on a standard tariff with the top 10 suppliers.

If you are the type of person that researches the market, visits MSE, and are generally financial savvy, then WeFlip isn't targeted to you.

Instead, it targets people who DON'T get around to switch every year, and will spend time to find the best deal. Instead, it appeals to people to spend 3 minutes registering with WeFlip and then they take care of the rest. They automatically switch you over (so not being led by the customer having to take up an offer so to speak).

Small Cap Value Report (Thur 28 Feb 2019) - GOCO, FOXT, PHD

Gocompare.Com (LON:GOCO)

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Graham Neary

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