Small Cap Value Report (Tue 12 Nov 2019) - IFRS 16, OTMP, G4M

12th Nov '19 by Graham Neary

17 comments 5138 reads

Good morning!

It’s Graham here with the Mello edition of the SCVR. I will be presenting this report on stage at 11.30.

Wish me luck.

Companies on the radar are as follows. I didn't get to cover Leeds (LON:LDSG) or AdEPT Technology (LON:ADT) before running out of time.

Onthemarket (LON:OTMP)

Gear4Music

Also, I'm giving a talk at 2pm today, in the PrimaryBid Room, on the subject of IFRS 16. I've spent more hours than I intended to, trying to understand this new accounting standard for leases.

That's probably the best criticism of the new rule: it's more work than simply expensing the lease payments, as companies habitually did for their operating lease payments.

But the new standard arguably presents a better (more realistic) economic picture of the company.

There will doubtless be a lot more to say on this topic in future, but for today, I hope you'll make it to the PrimaryBid Room, at 2pm.

OntheMarket

Share price: 71.2p (+3%)
No. of shares: 65 million
Market cap: £46 million

Persimmon Plc and Onthemarket sign listing agreement

I've been a consistent sceptic when it comes to Onthemarket. Today's news offers some encouragement:

Under the agreement, which covers listing and additional advertising products, Persimmon Plc will list all its residential developments at OnTheMarket from both its Persimmon and Charles Church consumer brands.

Context: Persimmon is said to have sold 16,449 new homes last year. The most recently reported number of total listings at OTMP was reported to be c. 642,000.

So the boost to listings is a few percentage points - not a game changer, but still good news.

OTMP sees it as a strategic success:

"In addition to growing our agent base, a key objective for OnTheMarket is broadening our property advertiser base, with new homes developers a priority focus...

"Following the agreement with Barratt Developments PLC which we announced in September, this latest agreement further broadens our advertiser base and increases our relevance to active buyers in the market, while addressing the opportunities in the new homes market."

And it's probably a win from a PR perspective, getting a household name (is that a pun?) like Persimmon to publicly back the…

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brianbathgate

12th Nov '19

Good Luck!!

JonBirdy

Hi Graham

Be interested to hear your views on £G4m

Today they report on own-brand revenue growth of 43%, something you wanted to see traction in when you last commented on them. This accounted for 27% of product sales overall (FY19 H1: 22%).

Revenue, gross margin, gross profit, EBITDA all up. Net loss reduced.

Have a great time at Mello.

Jon

MrContrarian

My morning smallcap tweet: Leeds bleeds, DISH ditches CEO

BigDish (LON:DISH), Telit Communications (LON:TCM), RTC (LON:RTC), Leeds (LON:LDSG), Craneware (LON:CRW), £G4M, AdEPT Technology (LON:ADT)

BigDish (DISH) CEO demoted to acquisition of restaurant groups and technology integrations with ePOS. New CEO 'with a proven track record of restaurant acquisition' starts 2 Dec. Sacks 7 of its 9 Territory Managers. Cutting costs. Never looked appetising.
Telit Communications (TCM) 9 months trading: Adj EBITDA and 'profit in cash' slightly ahead of mgt expectations but guides FY in line with mgt expectations. I'm short.
RTC Group (RTC) Network Rail extends contract by 1 year to Mar 2021.
Leeds Group (LDSG) poor FY to end May (why so long?) as guided in May. Pretax -£1.85m (+£0.9m). "Trading conditions remain challenging and it will be a difficult year again in 2020, as it will take time for the decisions taken this year to fully translate into improved results."

In line: Craneware (LON:CRW), £G4M, AdEPT Technology (LON:ADT)

Laughton

£G4M - as a holder I too would be interested in your thoughts Graham (and anyone else here).

My concern is reconciling "we now expect gross margins to be higher and revenues to be lower" which presumably means selling less stuff but for higher prices but this where "the market remains highly competitive"

johnsmith68

Gear4music Holdings (LON:G4M) - I sold out this morning despite the market's positive reaction. I recently watched some of Ed's videos / webinars about how to get the most out of Stockopedia and at a point of what feels like heightened macro-economic risk, they gave me a moment of real clarity about the power of Stockopedia's ranking system and a reminder that I want the rankings on my side to keep me from trouble. I understand all the arguments in favour of Gear4music Holdings (LON:G4M) and I wish holders every success but for me, this is really still a story stock with a jam tomorrow profile.

Paul has made the point that their strategy at the moment is one of rapid land grab and much like the big tech companies, we should wait for profits to flow once they have taken huge market share and the network effects can work their magic. I bought into that philosophy but today's statement sounds like a retrenchment whereby the focus is now on margin improvement. Whilst that's a valid approach, I'm not sure it's sustainable because Amazon or someone else may eat their lunch whilst they pause their dash for market share.

From a personal investment perspective, I've decided to give up on companies that are promising great things in the future and try to concentrate on the ones that are doing well now. Easier said than done but if Ed won't even consider companies with a SR<80 then I won't bet against him either.

Good luck to all.

Graham Neary

Thank you Brian! G

dscollard

to quote Jeff Bezos, "your margin is my opportunity": without true differentiation (product or service) that leaves almost every consumer facing offering vulnerable beit on or offline

FREng

It could mean that Gear4music Holdings (LON:G4M) aim to sell more own brand, where the costs and selling price are lower but the margin higher.

I'm confident you'll be a triumph, Graham. You have to be nervous before speaking - it's where the energy comes from - but we all know you're a star and at Mello you are among friends!

Thornabian

Big deals for Onthemarket (LON:OTMP) knew they had signed another after they issued 1mill shares for a new customer a few weeks ago. I don't mind some dilution to bring customers on board and instill loyalty. Same happened when they signed Barrats.

They break-even when removing marketing costs and many agents are still under the temporary free term agreements. They have also just announced reduced tariffs for short-term contracts and guaranteed no prices rises next year for agents who sign longer term deals and challenged Rightmove to do the same.

(I am long Onthemarket (LON:OTMP))

cholertonandrew

Hope the talks go well Graham.

Regards

Andrew

Zipmanpeter

Re Gear4music Holdings (LON:G4M) - I also liked the results and focus on margin. For once also, the "strategic progress" is also justified given:

Non-Uk now 50% of Revenues & still growing fast - good geographic diversification
Own label up to 27% Revs (+5% ppts) - more margin AND more security/neg power vs brands
Active customers +41% and %repeat customers still 27.0% (FY19 H1: 26.6%)
Margin focus + spend/focus on W/H supply chain this year--> no Xmas sales missed unlike last year; the next UK revenue comparator should be a soft target
Another year of (£3.9Mn) spend on Marketing - over time this must build a brand/ differentiator vs other smaller players and music stores (albeit not vs Amazon etc)

All G4M needs to do is to ride the wave of consolidation as the move to online occurs across Europe to do very well in another 2-3 years. I would say it is still on track to do this.

I hold (patiently).

Regarding Gear4music Holdings (LON:G4M) I wondered if any subscribers know if the management team has significantly changed since 2016 and during that period of growth.

I appreciate I could find this out for myself by reading the annual reports but I wondered what others may think about the management team at G4M. I do recall Paul previously speaking well of them. (Not that people can then change their views etc etc)

Snoo

Creightons (LON:CRL) is really motoring - I understand that they are speaking at Mello today (maybe even as I type).
If anyone is there and can update on this I would be grateful.

HornBlower

MrC I am also short TCM and have been for a long time. It seems operationally to have bottomed out at least and has adequate liquidity post the auto sale. The market cap is still very high given barely profitable and cashflow marginally positive. Given the unusual shareholder base I am struggling for a catalyst for any material change in share price. Any thoughts?

laurie

Creightons (LON:CRL) 2.00pm presentation at Mello, unfortunately at the same time as Graham. It must have been a convincing presentation.

disclosure: I own

https://melloevents.com/wp-content/uploads/2019/11/ML19Schedulev3.pdf

cafcash49

Just been in the Creightons presentation and I can say it was extremely good and I will be buying as a result. Long term looks great.

Small Cap Value Report (Tue 12 Nov 2019) - IFRS 16, OTMP, G4M

OntheMarket

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Graham Neary

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