Small Cap Value Report (Tue 15 Dec 2020) - PURP, CYAN, TED, TSTL

15th Dec '20 by Paul Scott

104 comments 11732 reads

Good morning, it’s Paul & Jack here with the SCVR for Tuesday.

Timing - today's report is now finished.

There are a couple of stragglers on my pad, that I'll try to look at later this week, e.g. Driver (LON:DRV) . A couple of readers mentioned K3 Capital (LON:K3C) which does look an interesting company, but it's quite complicated to analyse, so would take me too long.

Mello

Well done to Jack for his appearance in last night’s online Mello investor meeting, it was really excellent. As always Jack was fluent & talked sense, not always easy when the spotlight is on you. David Stredder, who organises Mello events, says that nearly 400 investors joined the event on Zoom.

As a follow-up, there’s another Mello Zoom today at 13:15, to fit in another presentation that there wasn’t time for last night -

Don't forget last night's Gamechanger, Accrol Group, will be doing a full one hour session with Q&A today (Tuesday 15th) at 2pm. Here is the link to tune in and hear from the Directors and ask any burning questions you may have but please note we are recording this one so you will need to be there! [Paul: looks like a typo, I assume they mean they are not recording it? Otherwise it doesn't make sense]

You can click here to access all research notes and investor presentations from Accrol.

We will be starting early (from 1.15pm) to cover unanswered questions from last night's Double Up on Smartspace, so feel free to join us when you like.

US Election

Thanks to the friend who alerted me that Betfair has just paid out on Biden winning the US Presidential Election. What a pathetic spectacle Trump is making of himself, refusing to concede defeat, stirring up trouble. It makes me feel that, despite its faults, our system here in the UK does at least provide stability, and clean handovers.

Book recommendations

Which prompts me to give a book recommendation. I’m enjoying John Kampfner’s “Why the Germans Do It Better: Notes from a Grown-Up Country”. It’s an easy listen on audiobook (Audible), and is an interesting run through of post-war German history, economics, and culture. He almost lost me in chapter one, with some snide, sweeping criticism of the UK’s political system, whilst praising Germany to…

Unlock with Email

Unlock with Google

Already have an account?
Login here

abtan

15th Dec '20

Ig Group (LON:IGG)

No opinion on the CFO to be honest. Lack of thorough answers could just have been because he was new, though I'll pay more attention next time.

Paul Scott

Excellent, thanks abtan, very thorough!

With so much cash in the bank now, I wonder if they might stop discounting the pay later option (some or all of it?) to boost profitability?

Regards, Paul.

davidjhill

Thanks Abtan interesting on Homeday. Possibly worth more than I had pencilled in then.

ISAallowance

Re. RA International (LON:RAI)

I agree that the order book continuing to be at or around its all time high bodes well for the future, and is reassurance that the previous high value was not simply a blip.

Revenue going backwards is a little disappointing, but I'm prepared to accept that they've been operating through a pandemic, and the IFM revenue remaining high is good IMO.

However, what we don't get told in the trading update is anything about capital expenditure. PPE as a proportion of both revenue and order book has been steadily increasing ever since IPO, and after the interim results I largely sold out after PPE reached yet another new high.

The graph below shows order book , revenue and PPE in £m on the left axis, and both order book divided by PPE and revenue divided by PPE as a ratio on the right axis. It clearly shows the increasing trend of PPE vs both order book and rev over the last few years. The final values are full year revenue estimated from the TU (should be close) and order book & rev / PPE derived from the PPE value at the HY, which may or may not be close.

I can see two possible interpretations. One possibility is that PPE was deliberated squeezed prior to IPO, to flatter ROCE figures and get the IPO away. An alternative explanation is that the increase in PPE signals a base for a long runway of increasing revenue and profit. A third possibility is that the truth lies somewhere in between.

Some of the PPE is land and property - normally I would consider that almost equivalent with cash and not worry about the increase, but all this PPE is by design in difficult parts of Africa, so personally I'd consider it all at risk of possible future write-down / stranding.

So after all that, I'm not sure what to think. On the one hand a cheap company potentially growing strongly with impressive management and a long runway - exactly what I like. On the other hand a rather worrying looking and unexplained (AFAIK) increase in PPE / capital intensity.

Re. RA International (LON:RAI) (again),

Just dug out my notes from the HY results, I'd also jotted

"Also, why was there a finance charge but no finance income given they have 20million of cash?"

Just like the increase in PPE, I don't think I've ever seen an explanation for that either. Will be looking closely at that line in the FY also.

Dojosan

16th Dec '20

I would have assumed Boohoo (LON:BOO) benefits from tier 3 - people having too much time on their hands at home + update in January that includes Black Friday + Xmas - should be a good one.

nicobos

Purplebricks (LON:PURP) just a quick comment on the market context as I’ve looked into this sector at work recently.

The Conpany went on a massive run on a lot of excitement that it could displace the traditional sales agent model and would take huge market share from offline. This hasn’t happened for a variety of reasons and market share of ‘online’ has remained at a ceiling of 6-7% now for the last few years.

The problem is, each incremental marketing pound beyond a certain amount is wasted as it does not lead to effective growth of new customer base and ROI. So the Company can be seen as ex-growth in some respects and ‘value buyers’ can rightfully ask if they can now run the business for cash profits instead, and value the Company accordingly.

Just don’t expect the business to be valued on a high growth multiple anytime soon imho, and it is very unlikely to scale the heights it hit on previous excitement unless you believe in a fundamental shift to online any time soon. The online model should have been a huge beneficiary of Covid but I haven’t seen any huge market share gains !?

As an aside, the last property I sold, we ended up going with the local agent (with experience and a list of interested buyers in the local area); our property went under offer in two weeks when marketed properly. My neighbours was on with Purplebricks for two months and didn’t have an offer!

The one upside of Purplebricks (LON:PURP) was I used the threat of competition to hammer the fee down ! So, as a consumer, I’m very happy with the purplebricks offering in some respects.

Boohoo (LON:BOO) my thoughts exactly.

I've seen previously they have put out a December trading update on the back of decent Black Friday sales etc.

Is the absence of one this year telling...? Or am I just clutching at straws, trying to attribute causality to the share price retreat in recent weeks!?

In for the long term irrespective.

john652

Thankyou Saarf, time will tell.

peterg

Except that in relation to the Dominion machines, whatever their strengths or weaknesses - real or imagined - they are used now with a paper trail which in many of the places where fraud is claimed (evidence free) which has been manually counted. All the evidence it this is the most closely checked and error free election in US history. On one side those who ran the elections (both Dem and Rep) on the other Trump (a man known for limited connection with reality), his family and a diminishing band of Republicans who are either in thrall to him or have no respect for the constitution and who have consitently failed to come up with any evidence any court has found at all convincing. It's really not hard to decide which side is telling the truth here.

Purplebricks (LON:PURP)

Hi Nicobos

Thanks for your thoughts. As a large holding of mine, I hope you don't mind a few follow-up queries/thoughts:

You mentioned that marketing isn't very efficient. Is there evidence of this somewhere, or is it just a hunch?
For reference I did some online advertising a few years ago and found that spending £10 produced far better results in percentage terms than when I spent £100. I 'm not sure why FB/Google worked liked this, though of course a 1% return on £100 was better than a 5% return on £10.
I believe the market share of hybrid agents has been increasing, albeit very slowly. See screenshots below and reference to the research note where it came from.
Research Note:https://www.twentyci.co.uk/wp-...

What's perhaps more important to note is that Purplebricks (LON:PURP) sold more homes than any other agent in the UK - that is very impressive and perhaps indicative of the company taking a larger portion of a slow growing segment.
I completely agree that the company should really have grown their market share by a greater degree during lockdown - a wasted opportunity.

Cheers

JGG

I feel sorry for those who rely on the MSM. They have an overwhelmingly anti-Trump agenda. Biden is a crook, who sat in his basement, safe in the knowledge (to quote him) of "the biggest voter fraud operation" ... Furthermore, the simult closzedown of vote counting in all the swing states on election night cannot be explained ....

Might I add that it is extremely disappointing that on a site where evidence is supposed to be examined Paul doesn't seem to wish to examine the levidence ...

Abtan Purplebricks (LON:PURP)

The DD I have access to suggests "the transactional market share of online agents has plateaued at ~6-7% after rapid initial gains".

For example, JP Morgan noted in June '18 that Purplebricks (LON:PURP) would have at 'least 15% of the market by 2022'. Reuters said in 2016 “Industry leaders and analysts forecast online operators could capture 25-50% of the market by 2025.”

This has not happened and long term online market share is ~7% and as plateaued which appears to be the ceiling due to:

i) many players (eMoov etc) have died off as they have not found models which make any money
ii) online struggle for traction out of core niches (e.g. low value properties)
ii) inability to achieve non-linear scale

It's this 3rd point which I allude to above. This means that growth remains directly tied to marketing spend which poses a significant challenge to profitability. Each incremental pound you spend beyond a certain point does not give you enough 'bang for your buck' so the business cannot capitalise on operational gearing by having a fixed cost base with additional revenue dropping into the funnel and straight to the bottom line.

The price comparison sites have suffered from the same effect - you would imagine they'd be super profitable but in reality, customers are not loyal and more and more marketing spend is required to keep filling the pipeline and maintaining profits.

Back to Purplebricks (LON:PURP) - as mentioned i'd expect much higher growth in COVID etc.

I don't know enough about the business to take a view either way. All I'm saying is the original thesis underpinning the previous stratospheric price rise is bust imho so don't expect the price to be tipping £5 any time soon.

It may still turn out to be a nice investment if they can start generating sustainable profits and cash flow and a moderate level of growth over time.

Furthermore, the simult closzedown of vote counting in all the swing states on election night cannot be explained ....

Of course it can be explained. The reason is perfectly obvious, and has been since the election. In states that didn't allow postal votes to be counted before polls closed the result tended to swing, as due to Trumps actions before the election in trying to discourage and undermine postal voting, the majority of postal votes in the swing states key to the false narrative were Democrat. It's not rocket science, it's well understood and it's a situation that Trump largely created.

And if there was any real evidence as keeps being suggested, then why has judge after judge, many Trump appointees, thrown out case after case, frequently with very critical language aimed at the plaintifs?

timarr

... as due to Trumps actions before the election in trying to discourage and undermine postal voting, the majority of postal votes in the swing states key to the false narrative were Democrat

Which seems to have put off some vulnerable Republican voters from voting entirely. And in Georgia some are saying they're now not going to vote because of the alleged fraud.

You really couldn't make it up.

Good for open minds, interested in objective anaalysis:

https://thefederalist.com/2020...

Some evidence with dark hunour attached:

mojomogoz

Wow. The Trump was robbed bs still going on here!

“...were they homeless, black or transgender...” when talking about those conspiratorially “allowed” to vote illegally. Clearly the genetically inadequate trying to steal the noble white mans hard won supremacy...right?

Are the noble Trump supporters and fraud callers not permitted their view as they have “white privilege”?

Ahh a journey down the racist conspiracy wormhole.

JGG you’re either dumb or over credulous if you present the above hypermedia bile and bigotry as evidence. Freedom of speech and opinion for sure in the American way...but this is not evidence. Please provide the evidence that there is a 68% error rate in Dominion voting machines.

So far you’ve only provided evidence that you are a <complete as appropriate>

Good for open minds, interested in objective anaalysis

Not a single piece of evidence, just a bunch of correlations gone wrong. As we know, correlation isn't causality, and can often be thrown awry by a third variable. In this case, Donald Trump polarising voters like never before. He got out the Never Trump vote like Biden never could.

I'm afraid until there's some actual evidence of how this grand deception was performed in full view of the entire world despite Trump telling everyone about it months in advance it's going to be hard to convince sceptics. In fact, they can't even convince Republican judges - because there's no actual evidence, just Rudy Giuliani turning up, sweating a lot and not actually alleging fraud.

Find some actual evidence or give it up.

Small Cap Value Report (Tue 15 Dec 2020) - PURP, CYAN, TED, TSTL

Mello

US Election

Book recommendations

Unlock the rest of this article with a 14 day trial

About the Author

Paul Scott

104 comments

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

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