Small Cap Value Report (Thur 30 May 2019) - VLE, DISH, SONG, BUR, BRY, WOSG | Graham Neary

30th May '19 by Graham Neary

35 comments 9669 reads

Morning all,

The main news on my plate has been the announcement by Volvere (LON:VLE) of a large tender offer.

Other things which have happened today:

BigDish (LON:DISH) has made another rollout RNS.
Hipgnosis Songs Fund (LON:SONG) has acquired another impressive music catalogue
Burford Capital (LON:BUR) announces the successful conclusion of a large case
Brady (LON:BRY) updates in line with expectations at its AGM
Watches of Switzerland (LON:WOSG) (new ticker) - Watches of Switzerland achieves a market cap of almost £650 million at IPO.

Volvere (LON:VLE)

Share price: 1253.5p (+2%)
No. of shares: 3.1 million
Market cap: £39 million

Tender Offer

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

This is by far my largest single holding, and it feels like this has been true for a while. It has been in my portfolio for three years.

Yesterday's announcement was released just after 3pm - perhaps a little unusual, but there you go.

Volvere has been discussed in this report twice very recently: on May 22 by Paul and on May 24 by myself.

On May 22, I said:

I would support another share buyback at the current share price... My reasoning is that the cash balance is just a bit too large for it to be used within any foreseeable timeframe, so it makes sense to return a bit more of it to shareholders.

I don't know if management read this report, but they evidently agree with my thought process. The latest buyback announcement is for up to 41% of shares outstanding, with a return of £16.6 million.

Reason for the Offer

Please check the archives for a complete description of the background story. As the tender offer announcement states:

The Group currently has approximately £36.2 million of cash but believes that the appropriate level of cash available for investment on an ongoing basis should be around £20 million and accordingly, the Group has funds surplus to its current operational requirements.

That is perfectly clear and simple.

And I'm glad that the company has settled on a figure on £20…

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MrContrarian

30th May '19

My morning smallcap tweet:

Gresham Technologies (LON:GHT), Quadrise Fuels International (LON:QFI)

Gresham Technologies (GHT) wins 'strategically significant' (=not that big) contract with a global central counterparty (which shall not be named) and rates and multi-asset class clearing house. Worth £1.2m over 5 years.
Quadrise Fuels (QFI) signs MOA with a Saudi co for exclusive relationship to progress and supply MSAR projects for Saudi. Aims to win MSAR installation contracts refineries for commercial supply of fuel in Saudi. May not lead to anything.

mercury61

600 (LON:SIXH).
Pension scheme buyout completion and trading update.
Graham last commented on this company in SCVR 19th Nov 2018. Maybe worthy of another comment. The completion of the transaction provides the Group with significantly greater liquidity and financial flexibility. The £4.1m/ $5.2m post-tax cash surplus will be used to fund working capital, invest in product development and provide flexibility to supplement organic growth and value-enhancing bolt-on acquisition opportunities. The full year results expected at the end of June/ early July 2019.

doug2500

Update from Aptitude Software (LON:APTD) on the future of Microgen financial systems.

Instead of being demerged and shareholders owning two different companies it is now being sold subject to shareholder approval.

Possibly a better outcome, certainly avoids some people having small holdings of a small company, and avoids the risk of volatility with holders selling out of the smaller company. But I can't help thinking it's a nice little company (Microgen financial systems) that produces cash. The sort of thing that's getting bought all the time as a takeover and here we are selling it for a fair price but not what it would be in a takeover situation.

Announcement here:
https://www.stockopedia.com/share-prices/aptitude-software-LON:APTD/news/aptitude-software-proposed-sale-of-microgen-financial-systems-urn:newsml:reuters.com:20190530:nRSd5402Aa/

Nice update from Burford Capital (LON:BUR) too spelling out how they recognise income on an investment.

jonno

I appreciate that this might not be the forum but there is pleasing announcement from Oakley Capital Investments (LON:OCI) this morning. This is a private equity orientated investment vehicle, market cap round £425m. Oakley Capital Investments (LON:OCI) presented at the Mello funds day.

The prime mover is Peter Dubens, a very successful entrepreneur who holds about 5% of the equity. The discount to NAV has been gradually reducing from well over 30% since the company adopted a more open dialogue with investors and introduced a dividend. The current discount to NAV is around 25% and yield about 2.1%. In some respects it is not too dissimilar to B.P. Marsh & Partners (LON:BPM) but it operates in a different area of expertise.

I hold Oakley Capital Investments (LON:OCI) AND £BPM

rmillaree

Burford Capital (LON:BUR)

I am probably reading the whole situation wrong here, but on a quick glance i read todays news as suggesting that if everything hadn't worked out Burford would have had to pay back $100 mill. Would that sum have been booked as a loss / exceptional loss this year? or was there a prior provision for this possibility. Ok i see the argument that constant revaluations must go on to give a true picture of where they are, on so it does make some sense to book profits as you go. But i don't particularly like the thought that 18 months after the year $100 mill of prior years profits could suddenly vanish - that's quite material numbers. Specifically as Argentina is concerned here i do see how anyone can say its prudent to book disputed income from the government until the cash is in the bank and out of the country and in a different country (mild used sarcasm here). Interesting and fair play to the company for providing chapter and verse details - i am sure they will give the same chapter and verse for the first big one that goes its up. I am presuming it was also reasonably flagged up previously that that is where they were ref this case for anyone who to the trouble to go looking.

RDHOWARTH

More good news for Graham's top pick Volvere (LON:VLE) yesterday afternoon. Returning £16.6m through a tender at 1290.... so if you are awash with great ideas and desperate for cash, a perfect opportunity to take profit. On the other hand it will nudge the NAV higher (should you care) and increase equity leverage to their next deal if you are willing to wait.

Richard Vasey

Would be interested to get Graham's views on the tender offer by Volvere (£VLE) to buy back shares at 1290p. In simple terms, I suppose it is an opportunity to crystallise a good profit (30% + for me in 16 months) or take a longer term view. The directorate has an excellent track record but, having sold most of their investments recently, there would seem to be no vehicle by which they can create value in the short term.

I know this is a major holding of Graham's and would appreciate his views.

Graham Neary

Hi RDHOWART/Richard - yes, I'm covering Volvere today.

Cheers

Graham

RichardK

I would like to support the two requests for Volvere (LON:VLE) - Volvere. I hold and don't particularly need the cash at the moment. But I do see a period of share price stagnation after the offer as the management do not make hasty purchases.

Richard

Paul Scott

Good morning!

BigDish (LON:DISH) is a very interesting concept - yield management app for restaurants, allowing them to offer discounts at specific days/times. It cropped up on my radar earlier this year, so I decided to download the app and try it out. It's absolutely fantastic - easy to use, and providing large discounts, at good restaurants, mainly at off-peak times.

Even though the business is generating negligible revenues at this stage, it's started a UK-wide roll-out. Today's RNS says they are expanding the regional roll-out managers from currently about 2 or 3, to adding 10 more - so a significant stepping up of the roll-out pace.

How to value the shares? On the historic numbers, you would probably value it at nothing! So it's all about what potential people see for the future. This is how I see it;

Bull points

Great app - simple, easy to use, and free for customers
An easy sell to restaurants, as only charges 50p to £1 per diner seated, and boosts their profits from bringing diners in at otherwise quiet or empty times
Restaurants are fully in control, so can customise offers to suit them
New CEO is experienced in sector, and formerly at Trip Advisor
Cheap tech team in Manilla
Attractive sector, with premium-priced takeovers of other similar companies, even early stage ones

Bear points

Easy to replicate the app, so...
Better funded competitor could copy the idea, and eat its lunch
Negligible revenues, and loss-making (although cash burn is quite modest- due to small team)
Not clear what the marketing strategy is - how to tell consumers this app exists? How much will a proper marketing campaign cost? Will it be effective?
Claims to be fully funded for now, but will clearly need to raise more cash at some stage, to fund marketing, and faster roll-out. But given share price roaring up, should be easy to raise say £2-3m if necessary with not-too-bad dilution
Rampy RNSs, and management seem a bit too excitable: big ideas, not enough execution in the past (although new CEO seems more hands on, I'm hoping to meet him soon)
Highly speculative, and almost impossible to value at this stage!

The share price has been rising on heavy volume for several days now.

What's it worth? No idea! I bought some shares (average 2.7p) because the app is so good, and the UK roll-out was just about to start. That seemed to me a good time to take a highly speculative, punt on this.

This share won't suit most people here of course.

Regards, Paul.

brucepackard

Your reading is correct. They recognised most of the gain when they sold ( $87 million of income ($100 million of the sale price less Burford's $13 million investment))

Fair enough if you don't like the accounting. If things had gone against them after the sale, then they would have had to write (some of?) that back down. I've been thinking for a while that the company might have a disappointing result going against them at some stage. So far it hasn't happened. But you're right to worry that they could disappoint in future.

For me the point about Burford is the asymetry of risk reward, the Teinver investment produced $107 million of proceeds on a $13 million investment for a total profit of $94 million, a 722% return on invested capital and a 39% IRR.

Laughton

BigDish (LON:DISH) - as a parent of someone who is trying to make a living out of owning/running a very small (20 customers is pretty packed) craft beer/cafe in the county town of Lewes I rather despair when such companies come along.

" and boosts their profits from bringing diners in at otherwise quiet or empty times" - the problem is that diners, in the main, are not stupid. Once they realise that they can eat for half price at certain times then they'll just change their meal times. Those that were eating at the "quiet" times anyway will now be able to eat for half price.

Fresh food prepared and cooked on the premises and a choice of ten constantly changing craft beers with the price pressures already on from the usual chain operators mean that 50% discounts would mean selling at a loss.

It's no surprise that we hear of restaurants closing on a weekly basis - the public shouldn't be surprised when, one day, they look around and find the only choice is "Subway" or similar.

Sorry - rant over.

FREng

Graham

Thanks for the observation that Watches of Switzerland (LON:WOSG) has a new ticker. It cheered up my morning.

FREng

Hi Laughton,

If you look into it in more detail, BigDish is a lot more sophisticated than you have imagined, and your fears are ungrounded I think!

In particular, using your 20-seat site as an example;

Restaurants can choose how many BigDish seats they want to offer, at 50% or 25% discounts. So in your case, a small restaurant might only offer 4 seats at a 50% discount, at say 6pm. Then maybe 4 more seats at 25% discount, at 6:30pm (it operates in half hour slots). After that, no discounts. It's all customisable, in real time, through the merchant app, which puts it streets ahead of other discount schemes in my view.

This has the effect of getting a few bums on seats when you first open, which attracts in more full price diners, as your place instead of being empty, has 2 tables, each with a couple already dining - much more appealing than walking into an empty restaurant . Remember that other customers coming in don't know that the existing customers are eating at a 25% or 50% discount.

The discount only applies to food, not drinks. Customers are required to buy at least one drink each, which recoups some of the lost gross margin. The full price diners who ask for tap water, are probably not generating much more gross margin than the discounted food people buying 1 drink each.

Studies have shown that people who get a good discount on food often recycle that into ordering something extra - e.g. a dessert, or a bottle of wine, where they wouldn't have done so if paying full price. So the average spend for a discounted meal often ends up being at or near the full price total spend.

DISH accumulates loads of data about customers. Whereas many other discount schemes have no way of knowing who used the discount, where else they eat, etc. In time therefore, DISH hopes to use its data for targeted marketing, and other purposes.

I'll let you know when BigDish opens in Lewes, so you can try it out! They're about to launch in Brighton actually, which is nearby, so why not check it out & talk to the managers of restaurants using it? That's what I did. Their main grip was that not enough customers know about Bigdish, so I'd like to see the company do a smallish fundraising, to up their marketing efforts, through social media influencers (foodie blogs, etc) being probably the best way to spread the word. Or introduce a friend type deals.

JohnEustace

Burford sold their interest in the Teinver case. They have been paid. The risk involved in collecting the money due from the Argentines now lies with the people that bought that interest. Presumably they bought at a discount to the full judgement amount that prices in their view of that risk.
The risk of an annulment was very low - say 1-2% max. Burford insured that risk for a 7% premium. They might have lost but that's the nature of selling insurance. They would have regained their entitlement to the full claim and been free to continue to pursue it.

Small Cap Value Report (Thur 30 May 2019) - VLE, DISH, SONG, BUR, BRY, WOSG

Volvere (LON:VLE)

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Graham Neary

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