Small Cap Value Report (Tue 10 Jan 2023) - SOS, MORE, CHH, CARD, AO., TGP, WAND, TM17, SCS, SHOE
Good morning, it's Paul & Graham here today.
Okay, all done for today. We've got a list of backlog items, so will try to circle back later this week, if time permits.
Top 20 value/GARP ideas - this article I published yesterday went down well, with 187 thumbs, so clearly subscribers like the idea of me flagging the most interesting value/GARP shares I've come across whilst writing these reports. Also, I'm delighted to see subscribers answering the call to list your own favourite shares (with reasons) in the comments. So that's well worth a read, if you haven't already looked at it. Lots of interesting share ideas for us to research.
There are loads more good shares on my watchlist, so I'll write up a second article, with the runners up on it. Not sure on timing, but some point this week, maybe the weekend? Also I'm planning a third article with 20 more speculative ideas (it's half done already, on the same spreadsheet).
It will be interesting to measure how these lists of share ideas perform. Although of course short-term, the market can do anything, so I won't be surprised if there's a say 10-20% drawdown at some point during the year, we have to expect that in volatile macro/market conditions, which suggests that keeping a bit of cash on the sidelines for buying the dips, and top slicing big bounces, might be sensible, if you think you can time the market - but easier said than done!
A lot of it also depends on whether value, or growth will be the dominant theme this year. Growth has certainly been skewered in the last year, as higher interest rates caused high PERs to crumble, puncturing the latest tech bubble.
So anyway, more lists of share ideas to follow, from me! And keep yours coming too, I always find it very interesting to look at what companies you rate highly, and it's a great way of finding new ideas to research, when we share our top shares lists.
Explanatory notes -
A quick reminder that we don’t recommend any stocks. We aim to review trading updates & results of the day and offer our opinions on them as possible candidates for further research if they interest you. Our opinions will sometimes turn out to be right, and sometimes wrong, because it's anybody's guess what direction market sentiment will take & nobody can predict the future with certainty. We are analysing the company fundamentals, not trying to predict market sentiment.
We stick to companies that have issued news on the day, with market caps up to about £700m. We avoid the smallest, and most speculative companies, and also avoid a few specialist sectors (e.g. natural resources, pharma/biotech).
A key assumption is that readers DYOR (do your own research), and make your own investment decisions. Reader comments are welcomed - please be civil, rational, and include the company name/ticker, otherwise people won't necessarily know what company you are referring to.
Agenda
Paul's Section:
Sosandar (LON:SOS) - [quick comment] - trading update out promptly on its busiest season, Q3 (Oct-Dec 2022). It continues to shrug off the consumer downturn (affluent customers, so not likely to be impacted by cost of living squeeze?), with +30% revenue growth for Q3 - slower than previous outstanding growth rate, but still remarkably good (and all organic too). Main point is it continues to trade in line with expectations for FY 3/2023 (co. guidance: revenues £42.8m, and PBT £2.0m). Cash position sounds OK, at £4.6m (up slightly in Q3) - I think it won’t need another placing, now it’s profitable. Last sentence suggests international expansion (via partners) is next on the agenda. My opinion - looking good, I remain very positive on this company, whilst recognising there is macro/fashion risk. (no section below)
Hostmore (LON:MORE) - [quick comment] - CEO resigns - probably for the best. COO Julie McEwan (COO) becomes interim CEO, as search begins for permanent replacement.
Trading for H2 (Jul-Dec 2022) - revenue trend for H2 overall is unchanged at -14%, as reported previously 22 Sept 2022 update I reviewed negatively here. This is in comparison with pre-pandemic 2019 numbers, which is hopeless - decent revenue growth is necessary to cope with higher costs (esp wages), so a decline is really bad. Net bank debt now £29.5m - better than guided, but worryingly high for a company that is performing badly. Finncap reduce forecasts this morning, now expecting a £(5.0)m loss for FY 12/2022. As I’ve mentioned before, FY 12/2023 forecasts don’t look realistic to me (too high). I reiterate my comments in Sept, that this share is now high risk due to combination of poor performance & high bank debt. Too risky - it might need to do an emergency fundraise, or worse. It’s gone horribly wrong unfortunately, so the sceptics were right. (no section below)
Card Factory (LON:CARD) - [quick comment] - we’ve been increasingly impressed with the trading updates from this greetings card retailer as 2022 has progressed. Risk receded, due to strong trading combined with renegotiated bank facilities. Today’s update is for 11m to end Dec 2022. Store revenues +7.1% LFL (impressive, up from +6.2% when last reported in Nov 2022!). Online hurt by Royal Mail strikes, down 28% on LY.
New guidance: £48m PBT (includes £3.5m one-off gains, so £44.5m underlying PBT). This is up from last guidance (Nov 22) of £37.5m PBT.
Net bank debt £46.5m (usefully down from £60m a year earlier). Outlook sounds confident - as a value retailer, it’s seeing good demand. Favourable hedges on energy (Sept 2024), and currency (for most of calendar 2023) at better than current forex rate.
My opinion - the strong share price looks fully justified to me, and valuation still reasonable based on my calculations (can’t find any broker notes). I mystery shopped a store yesterday, and impressed with the 5 for £1 cards - tons better than previous 10 for £1 cards, and staff told me the 5 for £1 cards in the doorway draw customers in. Thumbs up from me, well done to holders, you’re onto a winner here I reckon. If I owned CARD, I’d probably be holding, resisting the urge to top slice, because the improving fundamentals & reduced risk fully justify this recent big move up in share price. Well done to holders! (no section below)
Tekmar (LON:TGP) - Tekmar [quick comment] - this has cropped up on the top daily risers list, up 32% to 17.5p. It announces a M.East contract win of £8m, which should fall into the current FY 9/2023. I flagged this share here on 22 Dec 2022 at 10.25p, on a big contract win announcement (Dogger Bank wind farm), saying that it’s risky, but starting to look interesting as a possible recovery. More contract wins today reinforces that view. So I’m flagging it again, as something that more risk tolerant micro cap investors might want to do more research on. It looks an interesting company in a good sector, but there are risks over potential dilution, which would need careful scrutiny. (no section below)
WANdisco (LON:WAND) - [quick comment] in a similar vein, WAND announces another contract win for $6.6m, with a telecoms company, for a one-off data migration. It sees this industry as “being a core and growing market”, with a “healthy pipeline of further opportunities”, and “potential for significant expansion opportunities with this customer”. I have no idea how to value this share, but the newsflow seems exciting. For that reason, it’s on my list of speculative share ideas for 2023 (not finished yet, it's WIP). (no section below)
SCS (LON:SCS) - [quick comment] - worth noting that it has bought a (predominantly) online competitor (Snug Shack Ltd - co no 11397728) out of administration for only £875k. Yet this bolts on revenues of £20m pa (for FY 12/2022). SCS expects it to be profitable from its FY 7/2024. This looks a really good deal, as it’s complementary products, differentiated, with online expertise, and potential to include the new brand as concessions within SCS stores. This is a reminder that during downturns, cash-rich companies can absorb competitors for peanuts, which powers the next round of future growth. SCS shares are a value favourite of mine, and continue to get thumbs up from me. (no section below)
Shoe Zone (LON:SHOE) - our only big section today, as I run through the FY 9/2022 final results - see below. An enthusiastic thumbs up from me, I think this share is likely to do well again in 2023.
Graham's Section:
Churchill China (LON:CHH) - (£131m pre-market) [no section below] - this maker of ceramic products issues a brief full-year trading update for 2022. “Sound performance” continued over the final months of the year so that PBT will be “at the upper end of analyst expectations” (helpfully provided by the company as having a range of £8.0 - 8.8m). Both export markets and the home market are mentioned positively, and margins, while still lower than previous years, have improved in H2 (probably through higher selling prices as the company passes higher input costs onto customers?).
Paul covered this stock in detail in September. 2022 was very successful, but I share Paul’s concern that 2023 might be a bit trickier: the company previously said that their energy costs were “largely hedged well into 2023”. So at some point not very far away, the hedges will expire and the company will be exposed to probably quite significant cost increases, on top of the other cost increases (e.g. materials) that have already taken a chunk out of margins. More positively, demand appears to be holding up for now as incoming orders are said to be “satisfactory”. Most investors consider this to be a high-quality stock and I tend to agree. Trading at a PER of around 16x, with some headwinds on the horizon, I suspect that it’s fairly priced at this level. [no section below]
AO World (LON:AO.) (£401m pre-market) [no section below] - I wrote in November that AO was now “acting like a proper company, being run on behalf of its customers and its shareholders”. This was in contrast to the prior cash-burning strategy which seemed destined to end in disaster. At some point last year, perhaps when cash started to run low and things looked a bit shaky, AO’s management had a Road-to-Damascus moment and realised that life would be easier if they stopped messing about with their previous plans, and instead did whatever they could to earn profits and generate cash (!). After closing their German operations, they found many other ways to reduce costs and improve margins.
These actions are “gaining traction” and profitability is now running ahead of expectations. Adjusted EBITDA for FY March 2023, instead of being at the top end of a £20 - 30m range, will instead be somewhere within a £30 - 40m range. I’m still not sure that the company’s £400m market cap is justified but I wouldn’t want to bet against it as I think the company now has a great chance of repairing its net debt position and generating sustainable returns for its shareholders at last. Kudos to management for changing strategy and improving the performance of this former basket case. [no section below]
Team17 (LON:TM17) Team17 (LON:TM17) (£644m) [no section below] - we covered two profit warnings from the video games sector yesterday, as both Frontier Developments and Devolver Digital missed expectations. In each case, I saw stock-specific reasons for the disappointment. In the case of Frontier, a flagship title had failed to capture the imagination of fans. In the case of Devolver, I viewed it simply as a poor-quality IPO.
Team17 is one of the few other London-listed video game stocks, and its shares were down intraday by 17% yesterday afternoon. It therefore decided to reassure its investors and published the briefest of trading updates, confirming that “trading for the year ended 31 December 2022 will be at least in line with market expectations”. A scheduled trading update will be published next week (hopefully with more detail!). Team17 shares are still 6% lower than they closed last week, despite the reassurance given, so anyone who had this on their watchlist may be interested to take a closer look now.
As I said yesterday, the video game industry has its own cycles that are distinct from the economy as a whole, and each video game company has its own idiosyncratic performance based on its release schedule and the success of its individual titles. Solid results from the likes of Team17 should, I think, help to cast doubt on macro excuses provided by any other video games companies.
Paul's Section:
Shoe Zone (LON:SHOE)
217p (up 6%)
Market cap £106m
This share has done so well, more than tripling since Oct 2021 when the bull run began. We’ve reported on it loads of times here, since it keeps putting out positive trading updates, cleverly pitching guidance a bit below what looks achievable, but also genuinely enjoying strong demand (and high gross margins) by offering value for money products when consumer incomes are squeezed. So I like this company a lot, and also the founder management still has a lot of skin in the game. A strong balance sheet provides downside protection & ability to pay healthy divis. Lots to like here!
.
Today’s announcement -
Shoe Zone is pleased to announce its audited results for the 52 weeks to 1 October 2022
Revenue £156.2m (up 31% vs LY)
Adj PBT £11.2m (up 18% vs LY)
(adjustments exclude profit on sale of freeholds, and forex gains)
Adj EPS is 17.9p (per Zeus note) - so PER is 12.1x (at 217p per share)
Stores - a striking fall in the number of stores, 360 at period end (down 50 in the year). What it calls “Hybrid” stores is the growth area -
o 45 Big Box (2021: 51)
o 44 Hybrid (2021: 16)
o 271 Original (2021: 343)
Very short average leases (good) of 1.8 years, and an average reduction of 30% in rent on lease renewals. This flexible lease portfolio is I think a key advantage.
Digital revenues - £26.4m is only 17% of total revenues, and down 13.4% on last year. So the stores generate the bulk of revenues, and are more important. Also, with covid receding, there was a shift back from online to stores. Note that the online returns rate is amazingly low, at just 11.3% (up from 8.4%), and are often returned to the physical stores. This makes online an unusually attractive proposition for SHOE, so I’d like to see them driving that side of the business harder, as the economics of it (high gross margins, low returns rate) should make it very profitable, compared with say the fast fashion eCommerce companies, which face returns rates of c.50%, and hence struggle to make any profit.
Dividends - are generous - proposed final divi of 3.3p (LY: nil), plus a special divi of 8.2p (LY: nil), comes on top of an interim divi paid in Aug 2022 of 2.5p. That lot totals 14.0p, giving a yield (incl. special) of 6.5%. Bear in mind also that these are the initial divis after a pandemic-related hiatus (divis last paid in 2019), so I tend to find that when divis initially resume, they tend to be pitched at a fairly low level, which can then be raised in future. That looks likely hare, and judging from the healthy balance sheet & cashflows, I’d say the future divi paying capacity looks healthy. So this is a nice income share.
EDIT: I've just remembered to mention that it's currently doing share buybacks too, which enhances EPS.
Also, Zeus has total divis for FY 9/2022 at 17.0p, so it looks like there was another 3.0p divi to include which I missed, sorry about that.
I can't see why management would want to hoard any more cash, so it looks as if pretty much all future earnings are capable of being paid out in divis - very encouraging for shareholders I think! After all, future dividend paying capacity is more important than actual short term divis.
Balance sheet - looks very healthy to me, particularly as the context is a decently profitable & cash generative company (where investors don’t generally need to rely so much on balance sheet downside protection).
I won’t go through all the detail, because it’s all very healthy, with £24.4m net cash (all loans now paid off). Inventories are up, but a sensible reason given (earlier intake of stock to be sure of no supply chain disruption - that’s fine, as it should unwind back into cash in future).
There’s about a £10m deficit on the lease entries, which surprises me, given how short the leases are - implying it still has some loss-making sites - these are likely to be closed I imagine, giving upside to future profits?
Note the small pension deficit has disappeared. The commentary says it’s now an accounting surplus of £1.8m, which is not shown on the balance sheet. I wonder if it might become possible to offload the pension scheme, as TTG and RBN have recently done via insurance companies?
Cashflow statement - is nonsense, due to IFRS 16. However, the bottom line is that cash rose by £5.4m, which is after repaying £4.4m of bank debt in full, and absorbing £5.2m capex. So this is a genuinely decent, cash generative business. Although cashflow did get a boost from selling £3.6m worth of 14 freehold properties - sounds like a shrewd move given valuations have probably since fallen at a guess.
Outlook - I can’t see anything on current trading or outlook,so if I’ve missed it, please post a comment to correct me.
My opinion - this looks really good. I think the valuation has probably caught up with events, but I can also see good longer-term potential here. In particular, the online side of things looks ripe for development, and having just 11% returns rate is a stunning advantage over fashion eCommerce. Also the stores are being revamped and relocated to maximise profits.
Overall, I can’t fault this, and give it an enthusiastic thumbs up, particularly as the forecasts for FY 9/2023 look modestly set - hence I reckon we’re likely to see a repeat of the established pattern of trading updates that beat expectations, as 2023 progresses. It’s value for money product too, exactly what lower income families need right now.
Risk? Sourcing from China is the only major thing I can think of, but that affects many businesses.
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80 comments
Re: SCS (LON:SCS), I swear by Google Reviews and so a very low score of 1.4 and many negative reviews by very cheesed off customers suggests something odd... - https://www.google.com/search?...
Surely they are alienating their customer base and hurting their potential by cancelling deliveries at late notice.
Also, re: Shoe Zone (LON:SHOE), why was the Jan 15th 2022 StockRank only 64 - https://s3.eu-west-1.amazonaws... - but on 1st Feb 2022, the StockRank was 99 - https://s3.eu-west-1.amazonaws...
Was their a bug in the algo that means it picked up the quality/momentum of Shoe Zone (LON:SHOE) way too late or was their an event that shocked the stock into gear?
Shoe Zone (LON:SHOE) the full year result were released on 11th January, 2022, the Stockopedia figures were updated after 15th January, I don't think there was a bug, just a vast improvement in the profits.
The Stockranks did a good job with Shoe Zone (LON:SHOE). The momentum rank went above 80 at the end of October 21. The results in January 22 led to a jump in quality and value ranks. Since then momentum has been maintained but there has been a gradual decline in the value rank. The latest results have led to an improvement in value rank, but not as high as in Jan 2022.
I think it is very useful to have the history of the individual ranks but unfortunately this is not provided by Stockopedia.
A little late to the party, but regarding SCS (LON:SCS, my sofa is a Snug sofa.
i bought in spring last year when the waiting time at traditional retailers was stretching to 8-12 weeks.
for my first unfurnished flat, I didn’t fancy not having a sofa for so long.
Snug delivered it in around 3 days. It wasn’t cheap by any measure, but it all slots together from flat pack and is very comfortable.
it’s also possible to disassemble and reassemble, so great if I need to move in the future. A good customer experience, and very good model to appeal to renters in particular
good feedback - thanks.
That makes sense as to why SCS (LON:SCS) want to own the brand. Probably unlikely to cannibalise their own customer base so the £20m+ revenues it did before could comfortably be achievable again and therefore incremental. If the company can apply its cost discipline and get margins up then £850k could prove an absolute snip. Looks like a decent bit of business. minimal risk or capital involved.
PROCOOK (LON:PROC) Sorry to post so late in the day but I thought I ought to do so this when relevant. Further to comments including mine on this company I bought a copy of the most recent accounts for the large minority shareholder (https://www.fackelmann.co.in/) which has built a stake at an estimated cost of over £4.5 million . After reading these accounts I am not convinced that they have the firepower to buy the whole company, assuming that the controlling family would want substantially more than the current market cap, and in the end I decided that (a) it is well-nigh impossible for a private investor to do more than guess at the outcome here, and (b) buying a share only because of hopes for a bid is too risky for me. Therefore I have sold for a small gain.
Excellent analysis of Shoe Zone (LON:SHOE) thanks,. (I hold)With regard to dividend payout they stated 'It is
proposed that a final dividend of 3.3 pence per share be paid in March 2023 on
the basis of a 40% pay-out ratio. ' so they seem to have established this as a benchmark on an ongoing basis'
Interesting also that they havent used the buy now/pay later operators before so introducing the Paypal and Klarna offerings should help them in the low income segments (Paypal is no cost. Not sure re Klarna)
The product which we have bought regularly from Shoe Zone as a family is the in house clogs competing with Crocs. Interestingly those we bought last year at £6.99 are now £9.99 so they feel they can raise prices. And not surprisingly when the prices of Crocs have risen significantly and the Shoe Zone offering is still half to a third of the Crocs price and very competitive on the overall market especially with free home delivery. (very efficient)
I see Ten Entertainment (LON:TEG) is up over 10% today. Anyone know why? I hold and have a fair value around 325-350p but wondering what's caused the jump
In anticipation of tomorrow's trading statement i would suggest. Anecdotal evidence suggests it should be good; read across from Hollywood Bowl (LON:BOWL) and various positive comments on Stockopedia regarding family visits to Ten Entertainment (LON:TEG) venues.
Anyway David, like you I hold having bought at around 235p, so fingers crossed.
All the best
Trading Update on Wednesday plus they seem to be on a much lower rating to Hollywood Bowl so hopefully the upward price action continues.
ah yes so I see. Thanks both. Fingers crossed then. trading was good in last trading update so hopefully the Hollywood bowl read across comes through well. Looking at forecast earnings and cash generation my price target might be a bit conservative but we will see in the morning I guess :)
Thank you both for your amazing output today - lots of interesting stuff to read! Time for a lie down in a dark room.....
Strange that SThree (LON:STEM) have fallen more than Robert Walters (LON:RWA), today.
I’ve been wondering why SThree (LON:STEM) had fallen. Now I know…..
Might be an over reaction and buying opportunity. Let’s see.
Maybe but l'm a bit wary of recruiters at the moment, I have sold half of my Robert Walters (LON:RWA), I have enough SThree (LON:STEM) already.
Maybe but l'm a bit wary of recruiters at the moment
Depends on your view of the depth of any slowdown in Europe, Asia and US. If there’s a global recession, SPs will fall further. If there isn’t, SPs may still drop on unrealised fears but probably not by a great deal, making these levels attractive. I’m personally cautious on adding exposure here, but keeping my SThree (LON:STEM) allocation at full size as I don’t see big falls in profits for contract-focused operators. planning to add Robert Walters (LON:RWA) on weakness but not at today’s lows.
I only have an entry level investment. I’ll be watching the share price to pick up more.
SCS (LON:SCS) - agree with others that it seems a decent deal (how good i guess might take 18 mths before we fully find out).
i have been wary of retailers because of the potential credit insurance exposure , so i think the good news about any business expanding in this economic climate is that they must have good backing from all their stakeholders e.g. bankers, credit insurers + shareholders.
given the above and very positive chart trend, i have added on the news
Thanks Paul for all your output over the past few days. Cannot wait to get stuck in and read/listen to it, just tied up with year end admin at the moment.
Always surprised that the SCVR gets between 4,000 and 7,000 reads (I assume unique reads) each day, but only in th region of 150 likes and usually less than 50 or 60 comments. Perhaps 2023 could be the year when some more of the 7,000 get involved? I am sure they have value to add!
Regards
Michael
MichaelFBS
The counts are not unique – if an individual looks at the SCVR 3 times in a day the count will increase by 3.
I don't know if anyone else is interested in Gresham Technologies (LON:GHT) - I have held this for donkey's years - the results today are a slight beat against forecast. They are expensive - well, an EV/EBITDA of not far short of 15 is not my idea of cheap - and they have marked time over the past few years. However, Clareti revenues have been building steadily, and are now around three quarters of total revenues, so they are a totally different animal from the old world of permanent licenses. Their software adds more value when interest rates are higher - QE has not been good for them over the past decade. So it is at least a plausible bet that they can grow revenue at current rates over the next few years.
Interesting SCS (LON:SCS) acquisition today - £875k for Snugsofa.com. Essentially £20m of revenue - on the face of it looks like a good deal. Should be earnings accretive in 2024, which means it's likely currently loss making, given it's a purchase out of administration. If SCS can get the margins going in the right direction, looks like a great buy, for what is a small amount of cash in relative terms.
As I understand the announcement, SCS (LON:SCS) are buying a loss-making internet business and some stock out of administration. So this must be a "strategic" purchase - they are spending a million or so to extend their product range and improve their online presence. Plus more money to cover current losses and expand their in-store stock with the new products. Presumably an opportunistic buy, but I don't think they would be doing it unless they thought they could do more than just restore margins on the existing business. SCS (LON:SCS) is not my cup of tea as an investment - I avoid consumer cyclicals, and anyone can rent a shed and sell sofas - but the management have an impressively good track record.
How much debt are they taking on though?
Surely you cannot buy a business in this field with £20m in revenues for £875K.
I do hold by the way after suggesting to buy at 145p , but I will be exiting my position , as the announcement is not clear and lacking any meaningful numbers.
yiannos1 -
If you buy a business from the administrator, then you don't take on any of its debt. Debt holders are creditors of the old company. The administrator uses the £875k in this case to cover its fees, and pay preferential creditors first, and then anything left goes to secured creditors, and then unsecured creditors. There's not usually anything left for unsecured creditors in administrations.
So yes, it looks like SCS has just bolted on c.£20m p.a. revenues, for just £875k, looks a cracking deal.
SCS is likely to incur some re-start costs I guess, and 53 staff coming across (presumably via TUPE?) is a cost. That's probably why SCS says it should be earnings accretive from FY 5/2024, which implies some initial losses in FY 5/2023, which is to be expected.
Snug Shack Ltd has £6.3m inventories on its balance sheet at end 2021, when last figures filed at companies house. It's not clear what inventories are coming with the business to SCS, as the administrator might have disposed of the inventories already, to raise cash for creditors possibly? That's what the administrators of MADE did, auctioning off the inventories I believe.
I really like the look of this deal, although don't have enough detailed information to be certain. But +£20m revenues, at what can probably be profitable once costs are stripped out, for just £875k cost looks remarkably good.
Regards, Paul.
So yes, it looks like SCS has just bolted on c.£20m p.a. revenues, for just £875k, looks a cracking deal.
Wouldn’t that depend on whether those revenues were likely to recur annually? Surely that’s not guaranteed. We don’t yet know what the collapse of Snug Shack has done to its reputation and future prospects. Though we can hopefully expect management to have performed DD and have a plan.
Yes, good point BnB. The initial revenue gain to SCS is probably going to be a lot less than £20m pa at a guess. I did wonder if Sofa Shack was a heavily cash burning internet disrupter, but its last accounts filed at Cos Hse reveal a company with only £2 share capital (a startup in 2018, that raised on additional equity), has no bank debt, it seems, and a positive balance sheet of about £1.5m, all of which has come from retained profits.
So why did it go bust then? I don't know, but possibly withdrawal of supplier trade credit? (the main creditors are trade creditors), and presumably a downturn in trade once physical competitors resumed trading (Sofa Shack only had 1 store in Leeds, and the rest was online sales).
Once SCS has absorbed it, and sorted everything out, who knows the £20m revenues could be achievable again, especially if new sales are achieved via SCS's store network? Although 2021 was probably the peak year as we've seen for many eCommerce companies, so I think you're right to urge caution on that number, at least in the shorter term.
Best wishes, Paul.
Yes you are correct on this one. Too busy , that I haven’t realised it was from the administrator. However more details of the deal should have been announced by the company , so I have sold 1/3 of my position today and will completely exit as soon as possible.
I have read your 20 stocks for the year and I believe Rotala plc ( as long as they finalise their deal ) will at least double from here. It is just too cheap.
Thanks
SCS (LON:SCS) acquisition could be a good fit in store to complement the other subsidiary brands and hopefully will be accretive relatively quickly, adding 6/7% to their revenue.
Assuming SCS can achieve the same £20m revenue from this acquisition with their operating margin, the purchase cost is covered by a years trading.
Snug have a note on their website summarising the purchase and put this down to ‘difficult trading conditions in 2022’
Hi Graham, thank you for covering the games industry in some detail. I think it's an exciting sector with great potential. Your insight is always appreciated.
When the update comes, I'd be really grateful if you could cover tinyBuild (LON:TBLD. They IPO'd recently, hence being over 50% down from their listing price, but I think they are an organisation with great potential - especially now that they trade at a reasonable price.
They are similar to Team17 (LON:TM17) in many ways - they have a reasonably large back catalogue of indie games which can mitigate against the poor performance of current titles and they are looking to make strategic acquisitions from their reasonably large cash pile (circa £35m).
A few differentiators though:
- Their CEO, Alex Nichiporchik, seems very good. He's experienced and passionate about the games industry (a bit of a thought leader) but seems to have his head screwed on when it comes to managing a publicly listed company. Tiny Build provided admirable support to staff affected by the Russia / Ukraine conflict which was terrific to see (relocated them etc.) I can't help but compare this to TM17 with the claims of bullying and overworking made a few years back against the leaders of the organisation.
- They look to build franchises from successful titles which capitalises on their popularity and provides longevity. Hello Neighbour is their most successful to date. Unfortunately Hello Neighbour 2 came out to poor critic scores in Dec (about 6/10 on Steam) though looking at the underlying reviews it's clear they still have a core fan base which e.g. buy their plush toys, watches the new TV show on Youtube, plays the mobile games etc. This also fits in with the trend of investing in titles but always dropping new updates to keep players engaged.
I also believe they have good fundamentals and prospects for growth going forward, but I think their next update will be key. Not sure when it's scheduled for - but wanted to put it on your radar as one to look out for. Many thanks
Awesome comment, thanks JACXX! I'll be sure to keep an eye out for TinyBuild when they release an update. Much appreciate the insight you've provided here. Best wishes. G
Should be end of January, I too am keeping a close eye on developments there!
I tried to buy TinyBuild a few months back but Hargreaves Landsdown don't allow dealings.
They do now
slightly out of our usual size range but did anyone see GlobalData (LON:DATA) materially ahead of expectations trading update this morning?
Not one I have previously followed but bought a few early doors. Looks like FY23 expectations are £100m ebitda and the company is materially ahead of that - so at least 10% and possibly quite a bit more. If that pushes closer to £115m then it's a company in a massive growth phase on 11* ebitda - feels a bit cheap?
Anyone got any closer insights into the company?
GlobalData (LON:DATA) - a company in a massive growth phase on 11* ebitda
Interested to know how you derive this multiple? Sharepad shows FY23 EV/EBITDA of 16x, Refinitiv 15x. A 10-15% uplift in EBITDA still leaves us well short of 11x. Apart from that, looks a nice business. CEO is definitely aligned with shareholders!!
yes - net debt gives an EV of around £1.6bn so on an EV/EBITDA basis now looks like 13-14* after todays upgrade. Nonetheless not particularly expensive for such growth. Appears highly cash generative too - not sure of exact ratio but seems cash gen is pretty close to ebitda so that net debt used on M&A should almost halve assuming they don't buy anything else.
Looks a nice business. Didn't the CEO previously set something up that he went on to sell for several hundred mill too so clearly knows how to build businesses.
Didn't buy much this morning but feel this might be one to add to. All opinions welcome - anyone got any negatives on it?
Poor old Hostmore and for that matter Unbound. I can say this only because I took a loss on both last year. But they have reinforced a lesson I have learnt already many times and it is that, that annoys me about this loss. Private Equity, quite reasonably focuses on maximising their return on their investments. They have more knowledge than me on the company and its sector. They have access to a much broader knowledge base than I. Some are pretty unscrupulous, and I don't know who they are. So given I know all of this why would I buy anything directly from them? The advantage lies with them. Let the market decide the value not Private Equity because one is transparent and one isn't. What's more I wouldn't want to be the stooge who gets put in as CEO as it will be a well paid short term job as the our friend at Hostmore has found out. Camtab stick to your own rules!!!!!!
Yes, I agree with all of that - I think there is a term to describe it - 'asymmetrical knowledge', where the seller has a huge advantage in the transaction. It's similar when buying a used car in a private sale, best to assume there is something wrong with it, then you need to do a fair bit of 'due diligence' and have a small dollop of luck.
Yes. There’s a 1970 paper “a market for lemons “ on information asymmetry. By economist George Akerlof.
Agree Hostmore (LON:MORE) and Unbound (LON:UBG) are an absolute disaster and I have no doubt that the previous private equity outfit at Electra Private equity have completely mislead investors as to their viability. Looking back at Paul’s simple spreadsheet for calculating the demerger value at the time of the transaction the combined value of the two businesses is now more than 90% down from the pre merger value of Electra Private Equity which from memory was around £5.50. Sadly I still hold a very small, and getting smaller by the day, amount but given that to sell will cost a significant portion of what value is left I am waiting for a zero commission offer from my platform provider to ditch these two absolute dogs!
Another thing that put me off was that these were the last 2 companies to be sold off by Electra (the original PE fund that was being wound up) - they sold much of their portfolio fairly swiftly but were clearly struggling to sell these so that was probably a warning sign.
I heard through the grapevine that Electra turned down a bid for TGI that was about 120p per share, as they thought it was worth more.
I agree with the general principle not to buy anything from private equity. But in the case of Electra, it was a demerger of the 2 existing businesses.
Management of Unbound (LON:UBG) are definitely dishonest - they lied to me on a telephone call about not needing to raise fresh equity, when they were working on a dilutive discounted fundraise, which was announced shortly afterwards. So that one is a complete bargepole for me.
As for TGIs, mystery shopping it repeatedly revealed an over-priced menu, and sodas which never had any fizz in them. Despite me flagging this to the CEO personally on a telephone call, and him briskly promising to fix it, it never was fixed. So every customer at the Bournemouth store has been served flat soft drinks for well over a year now. For this reason, I'm glad the CEO has gone. He talked the talk, but didn't run the business very well.
I noticed that the £10 promotion (Mon-Thu only) for starter+chips+flat soda resumed yesterday, so I'll mystery shop the B'mth site again today or tomorrow.
Sorry this one has been such a disaster, as mentioned before, I became bearish on it last year, due to the excessive bank debt, and trading becoming loss-making (ignore the EBITDA nonsense numbers). But by that point, I'd lost most of my money originally invested in it. You can easily work out for yourself how -14% revenues compared with 2019, smashes up the bottom line at c.75% gross margin, and much higher labour costs.
With a market cap of only about £15m now, it could go either way -
Bullish - recovery, and multibagger.
Bearish - bank insist on a refinancing, causing massive dilution at a deep discount. Or worst case, if trading deteriorates further, puts itself up for sale, no takers, and it goes bust.
It's incredible how quickly things can go wrong in a downturn. All the figures stacked up nicely a year ago - a bullish stance made sense, given the numbers we had available. Although I will say that the mistake I made was relying too heavily on forecasts. There wasn't a clear enough track record of past performance, and I think the private equity people exaggerated its profitability, and hid the real level of debt in presentations.
Ultimately though, the whole sector is struggling badly - because there's still over-capacity, so we're probably going to enter a brutal year where many cafes, bars & restaurants go under. The sector news is dire - with the latest Govt reduction in energy support from April 2023 looking set to finish off many struggling companies. Will Hostmore be on the survivors? At this stage, I wouldn't bet on it, so am happy on the sidelines. I'd rather pay more once it looks as if survival is safe, than take a punt when it could be a wipe out.
Sorry again.
Regards, Paul.
I totally agree that you should be very wary of buying from Private Equity - they are financially driven and logically will only sell if they think the price is more than the business is worth more to them.
But I don’t think that was the lesson to draw from Hostmore/Unbound. My recollection was that Electra (a listed PE business) was liquidating. It managed to sell off most of it assets and return cash to shareholders. But these were the two businesses it did not find buyers for so £UBG remained the listed rump and £MORE was demerged. So these two companies were not sold by Electra.
I think if there is a specific lesson to be learned from Hostmore/ Unbound is that it is likely that a business is a dud if the owner has looked to sell and (presumably) along list of potential buyers have all decided not to buy.
My experience of businesses which are put up for sales and which receives no offers which management's view reflect the value of the business is that they often come to grief #rosetintedspectacles.
Found the spreadsheet summary very useful. Already hold a few of the highlighted names and and made me have another look at Macfarlane (LON:MACF) which I have held before but slipped off my radar - seems way too cheap for such a solid business with good growth prospects, and added some today.
Yes good shout on Macfarlane (LON:MACF) Bouden, I also have watched and held in the past but had dropped off my radar.
Bank debt reduced from 9.7 million down to 5.0 million in last trading update which is reassuring as the growing debt for them has been a fly in the ointment, although offsetting that against growth in fixed assets with little or no share dilution is impressive.
The relentless growth in revenue and profit is stellar and reassuring, as they clearly know what they are doing!
Yes I opened a position today also, looking very good, and seems to have been overlooked with this rally.
Card Factory (LON:CARD) Thanks Paul for highlighting this at the last update. I owe you a drink if I ever see you! There is a heck of a lot of blank space/ little resistance on the chart. I think this is good for 170p in the next year. I had the same feeling about Shoe Zone (LON:SHOE) a year ago i.e. a good company which should return to its former highs. In Card Factory, you have a stock that collapsed to C45p because the lock-downs looked terminal for it as the requirement for funding increased. It no longer needs to have its shares diluted and hence the return of shareholders scared off by that. The industry is contracting at about 2% per year, but they are looking to offset that with gifting and of course the fact that unlike much of the competition they produce their cards in-house and don't have to give away margin to Hallmark et al. It wont be straight up, it never is - but if you can resist the inevitable ups and downs getting there it looks good to me.
Sosandar (LON:SOS)
Full disclosure: I have not been a fan of this company for some years now, so the below is somewhat tainted by negative preconceptions.
My doubts have stemmed for a few reasons, including seeing figures inexplicably changing from one year to the next. To be fair, things have been pretty consistent for a while, but then it happened again today with a change in last year's AOV figure.
TODAY'S UPDATE
LAST YEAR'S UPDATE
----
On the surface the difference is negligible.
But as one of the financial bods that used to collate these numbers and report them up the chain, all I see are underlying problems. A number so simple and so important for the business should not be changing from one year to the next. It just seems a little...careless?
---
More quantitively it looks like Q4 growth is going to slow to +22% vs last year and -12% Q-o-Q.
That's quite a slowdown vs last year.
Holdings RNS are a deluge in my news feed when there is a takeover. Often I skip tracking. But there seems to be an interesting situation developing at Appreciate (LON:APP) , for any holders out there.
Samson Rock has steadily built a 20% stake now, since the takeover offer has been announced by Paypoint. Samson Rock also has holdings in other takeover candidates, so they seem to be a specialist in this area.
Initially I thought they were interested in just arbitraging the takeover discount, as Appreciate is trading c5-8% below Paypoint's offer.
However, I realised that (1) 75% of shareholders need to vote for the takeover to go through, and (2) they have built up a 20% stake now, and (3) very few shareholders have given irrevocable support to Paypoint.
So it might be that they are actively negotiating with Paypoint to up their offer?
Or they might just be happy with the 5-8% arbitrage profit, for tying up capital for 6-8 months...
(I hold Appreciate in the Boon Fund)
Samson Rock has also built up a 1% short in PayPoint (LON:PAY) . I hold both
I believe Samson Rock have also acquired more than 10% of Crestchic LOAD which I hold. Hard to believe they are interested in the negligible return of a couple of pence based on Rotorks £4 a share offer.
Robert Walters (LON:RWA) - I thought this might have warranted a place on your list of 20 best ideas, Paul. But makes sense to only include one recruitment company and your choice, SThree (LON:STEM, has more resilient revenues. Today’s TU is headlined “Difficult Market Conditions“ and that tells you all you need to know about the company’s concerns for 2023. I’m surprised the initial sell-off has moderated.
I do think RWA is an excellent business and I have a very high opinion of its founder/leader. He will negotiate any downturn calmly and competently and the beauty of recruitment companies is that costs fall dramatically when revenues stall owing to the heavy element of commission in the remuneration mix, while cash generation improves whenever contractor numbers dip. I see no balance sheet risk. The SP looks excellent value based on current trading but I do wonder, if we go into a global recession that significantly impacts Asian customers who form the largest geographical bloc, how badly - if only temporarily - trading will be impacted. So my hunch is that a lower price is coming, perhaps only based on fears of this eventuating and without it necessarily occurring. Uncharacteristically for me, usually wedded to buy and hold, I sold near the peak and will buy back aggressively below £400 if the opportunity occurs, delivering a near 6% yield on top of excellent capital appreciation prospects. Perhaps the yield will support the price near £450 however - still a good entry IMO.
Morgan Advanced Materials (LON:MGAM)
Cyber secuirty breach recorded. Doesn't look to have shifted the share price much today.
SIG (LON:SHI)
Not covered here since March 22 when Paul was unimpressed.
Results appear significantly improved. Is this a turnaround?
(I bought some).
In line with 15% sales growth. Expecting £80m operating profit, market cap is about £370m. High debt but seems no immediate need for funding. Have topped up.
Supreme (LON:SUP) Positive update 'Trading across Q3 FY23, the Group's busiest period, was up significantly compared to Q3 FY22 with revenue and gross profit up 30%....well placed to meet market expectations for the year ended 31 March 2023, which were increased in November 2022'
You can read our note here https://www.equitydevelopment....
Shoe Zone (LON:SHOE) . One of the few saviours for my portfolio last year. Continues to please with great looking results out this morning. Would like to see comments and analysis.
We're rattling through the updates today with short sections, lots of interesting stuff today! I'll do SHOE next, another value retailer that's doing well.
I'd be interested in thoughts on this too Shoe Zone (LON:SHOE) . I've read this as whilst physical stores are doing well, there has been a dip online. This may be attributable to more people coming out post COVID (the Amazon's etc have also dropped markedly).
This has been my outstanding holding which has helped with some losses last year, although if my maths are correct, even on today's price, including special and interim divs, is this still yielding over 10%?
My avg buy price is £0.95 so I see this as a strong hold, buy on the dips, especially given their ongoing share buyback scheme.
With respect, have you ever heard of the words ‘please’ or ‘thanks’.?
It absolutely amazes me the lack of manners and the sense of entitlement of some Stocko subscribers .
Really offputting .
Not really sure what you are referring to here, unless it is my requests for comments on Shoe Zone (LON:SHOE) . I was just interested in the views of any other subscribers/holders, and thought that was a perfectly reasonable request. Not sure why any offence was taken- certainly none intended.
If you need clarity on this then I'm afraid you are beyond help
My morning smallcap tweet: Top of the Flops
Hostmore (LON:MORE) Marks Electrical (LON:MRK) Gresham Technologies (LON:GHT) WANdisco (LON:WAND) ADVFN (LON:AFN) Nanosynth (LON:NNN) Sancus Lending (LON:LEND) Robert Walters (LON:RWA) Churchill China (LON:CHH) Smiths News (LON:SNWS) Zenova (LON:ZED) AO World (LON:AO.) Card Factory (LON:CARD) Hornby (LON:HRN) Tekmar (LON:TGP) Gulf Marine Services (LON:GMS) Eden Research (LON:EDEN) Trackwise Designs (LON:TWD), Sosandar (LON:SOS), SIG (LON:SHI), Supreme (LON:SUP)
◄Hostmore (MORE)► FY-Jan trading. H2 rev down 14% on FY19. In line? CEO scarpers. He is thanked. Internal promotion of CEO. [SP=14.02 Cap=18m]. I hold.
◄Marks Electrical (MRK)► guides Q1-3 rev up 22%. Q3 rev up 33%. Sounds in line.; [SP=90 Cap=94m]
◄Gresham Technologies (GHT)► guides FY-Dec rev and profit slightly ahead of recently upgraded market expectations (rev £48.5m, adj EBITDA £10.1m). "We now have very good visibility across both Clareti and non-Clareti with over £42 million of 2023 Group revenues already under contract." [SP=176 Cap=147m]
◄WANdisco (WAND)► wins $6.6m contract with global telco. [SP=899.45 Cap=593m]
◄ADVFN (AFN)► FCA approves Amit Tauman, together with his father Yair Tauman, holding up to 29.9%. [SP=34 Cap=16m]
◄Nanosynth (NNN)► £0.4m placing at 0.18p to keep the lights on. Doesn't mention the 35% discount. I guess that is only of interest to shareholders. [SP=0.3 Cap=7m]
◄Sancus Lending (LEND)► cuts offices from 5 to 3. Will cease new business activities in Gibraltar due to insufficient quality lending opportunities. CFO will leave. She is thanked. [SP=1.5 Cap=16m]
◄Robert Walters (RWA)► warns FY-Dec profit lightly below market expectations due to global macro. Net fee income up 20%. [SP=550 Cap=412m]
◄Churchill China (CHH)► guides FY-Dec pretax at the upper end of analyst expectations of £8m to £8.8m.. [SP=1227 Cap=135m]
◄Smiths News (SNWS)► renews Telegraph contract. [SP=55 Cap=136m]. I hold.
◄Zenova (ZED)► sub-distributor in the USA, Omnis, has placed an initial order for 7,500 FX500 mini fire extinguishers. [SP=10.98 Cap=10m]
◄AO World (AO.)► guides FY-Mar adj EBITDA £30m to £40m cf previous guidance £20m to £30m. [SP=69.6 Cap=402m]
◄Card Factory (CARD)► guides FY-Jan EBITDA at least £106m and pretax c. £48m+, ahead of expectations (|whose?) [SP=87.2 Cap=299m]
◄Hornby (HRN)► Q1-3 rev up 6%, behind budget due to the challenging consumer economic climate. Guides FY modest underlying loss before tax. [SP=29 Cap=49m]
◄Tekmar (TGP)► wins contracts worth £10m. [SP=13.33 Cap=8m]
◄Gulf Marine Services (GMS)► guides FY-Dec EBITDA $70-72m, in line and FY23 $75-83m. Latter "driven predominately by a combination of higher utilization levels (expected to increase from 88% to 93%) and increase in day rates (expected to increase by 8% across the fleet)". [SP=4.76 Cap=46m]. I hold.
◄Eden Research (EDEN)► guides FY22 rev up 50%, pretax loss c. £2.8m both better than mkt exp of £1.7m and £3.1m resp. [SP=4.49 Cap=17m]
◄Trackwise Designs (TWD)► trading resumes. [SP=1.18 Cap=2m]
In line: SOS, SHI, SUP
Morning MrC! How on earth did you manage to do all those, before 8am! Staggering, I'm in awe! :-)
Maybe Mr C is assisted by some special coffee? :)
I'm very good at speed reading now!
Morning !
Does anyone here have shares in Coral Products (LON:CRU), specifically with IG Index share account ? If so, you should check you received the dividend on 30th November as I did not and I've emailed them and they have told me they are chasing it...
(bizzarely, Coral Products (LON:CRU) had 2 dividends go ex-div within one week of each other. The one ex-div on 3rd Nov has not been paid but the one ex-div on 10th Nov has been paid)
Coral Products (LON:CRU) I hold and have had 2 Dec divs paid into a/cs with Barclays Smart(hahaha)Investor
arrived on 12th (.2p) and 19th (0.5p) Dec. I think that is correct although looking on various websites I can't find any ref to the .2p one, including checking the Div Summary here on Stocko and on HL. Last year Coral paid two divs on the same day for the same amount and it took me ages to sort out with them as for ages they refused to accept that I was correct. It turned out that they had actually sent back to the registrars all the money they got for Coral shareholders for one of the divs as they thought it was an error - duplicate payment. My complaint fizzled out as registrar and Barclays admin blamed each other
Sosandar (LON:SOS) say +30% growth for the last quarter. This is still a respectable result, but:
So I am not sure the market will take this well. I would love to understand why sales have slowed so much - maybe third party sales are now fully embedded?
On the plus side the margin improved further. (I hold)
It would be interesting to know how much of the recent growth has been price led versus volume led. My suspicion is that a large proportion of that +30% growth may simply be taking advantage of wider price inflation and the growth in volume of units sold may be slowing significantly.
Welcome other people's viewpoints.
Still very impressive considering where they are and what they have done. Still some way to go but to create a space and a brand from nothing is rare. Management seem spot on.
No thats not the case at all. Prices on some lines had been raised a little but small %ages. They confirmed this in the last webinar they did back in November.
But since they are trading in line with expectations both at a revenue and profit level this is the growth that they expected. It may not be a beat but it isn't a worrying downtrend as you allude to. Margins are good and remember that this years festivities were impacted by the many rail strikes. Lots of xmas parties were rescheduled to Jan in London because people couldn't get in too which won't have helped.
Marks Electrical (LON:MRK) - Rapid 33.4% revenue growth, margin expansion relative to the first half, and a record level of delivery volumes were the main features of Marks Electrical’s FY2023 Q3 trading update. Furthermore, the strength of Q3 business lends significant credibility to the company’s view that it is on track to achieve its full year targets, and bolsters confidence in our fair value for Marks Electrical Group of 150p per share based on relative valuation and DCF.
Marks Electrical’s strong 33.4% growth in FY2023 Q3 implies a 22.0% 9-month growth to 31 December 2022 and acceleration from 15.1% growth in the first six months. The company advanced sales in the important Q3 trading period, which in FY2022 was equivalent to 28% of annual sales revenue. The strength of Q3 sales growth should also have increased operating leverage and thus driven margin expansion. We note that with 82% of our FY2023 target already achieved, the company is in a strong position to meet current expectations for sales revenue and profitability.
Cash conversion remains an important part of the Marks Electrical investment case, which should have benefited in Q3 from maintenance of inventory levels during the peak trading period and an implied improvement in the inventory:sales ratio. A strong cash position augurs positively for dividend paying capability. A 0.3p interim dividend was paid to shareholders on 23 December 2022.
Marks Electrical’s in-house delivery vehicle fleet achieved record quarterly sales volumes in Q3. Service levels and customer satisfaction should benefit going forward from the company’s in-house installation service. Over 3,000 installations have been completed since the offering’s launch last August.
Full note & audio summary here: https://www.equitydevelopment....
Gulf Marine Services (LON:GMS) performing in line and with the current demand for energy due to Russia's (Putin's) removal from the energy market should be good short/medium term. Any thoughts Paul??
Thungela
Thungela
Not a comment on this but an amazing 50% yield. Would be interested in any views on this stock, particularly Paul