Small Cap Value Report (Tue 15 Jan 2019) - FLYB, FDEV, EHG, GYM, CALL, GAW, BOO, KAPE, DTY

Tuesday, Jan 15 2019 by

Good morning!

I am back from a fine holiday in Athens - should have gone there a long time ago!

The economy and general state of economic progress did not seem to be doing particularly well on the ground, although that did not detract from a fantastic experience of Greek culture, cuisine, architecture and history. Did I mention the food?

The experience of Greece within the EU has been, let’s be diplomatic, somewhat mixed. And today is apparently going to be the voting day for MPs when it comes to Mrs May’s EU Withdrawal Agreement. It is natural that questions of politics will be on our minds.

This being the SCVR, I will be covering company news first, referring to macro developments only if they have a major impact on the markets.



Today we are covering:

Flybe (LON:FLYB)

  • Share price: 2.6p (-37%)
  • No. of shares: 217 million
  • Market cap: £6 million

Offer Update

This looks like very bad news for those who were hoping for an improved offer for Flybe.

The consortium, Connect Airways (Virgin Atlantic/Stobart), is lending Flybe's main operating company £20 million, under revised conditions. Flybe wasn't able to satisfy the original conditions.

£10 million of the funds will be released today - implying that it is needed to keep the lights on?

An agreed sale of Flybe's main trading companies to the consortium for £2.8 million will proceed without shareholder approval, since Flybe now has a standard listing on the LSE, rather than a premium listing.

The rationale for switching to the standard listing was presented as follows in Flybe's interim report last year:

This would have the benefit of allowing the Company greater flexibility when considering divestments, particularly to recycle cash, as the current low market capitalisation places restraints and complexity on such disposals for…

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All my own views. I am not regulated by the FSA. No advice.

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Flybe Group PLC is a United Kingdom-based company. The Company is a shell company.

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Frontier Developments plc is engaged in developing non-game applications and video games for the entertainment sector. The Company's segments include self-published and external publishers. The self-published segment is engaged in sales of the game and digital in-game. The Company has completed work for external publishers, including Screamride and Tales from Deep Space. Its games are developed using its COBRA cross-platform technology, allowing code and resources developed on personal computer (PC) to be compiled and run on XBox360, PS3, iPhone operating system (iOS) and Nintendo WiiU. The Company offers Elite Dangerous game on PC, Mac and Xbox One. The Company is engaged in developing games of the strategy/simulation genre, including RollerCoaster Tycoon 3 for PC and Zoo Tycoon for Xbox. The Company also offers Planet Coaster, its self-published franchise. more »

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Elegant Hotels Group plc is a holding company. The principal activity of the Company and its subsidiaries is the ownership and operation of hotels and restaurants on the island of Barbados. It owns and operates six freehold beachfront hotels and a beachfront restaurant in Barbados. Its hotels include Colony Club, Tamarind, The House, Crystal Cove, Turtle Beach and Waves. It operates Daphne's restaurant, which is located on platinum West Coast in Paynes Bay, adjacent to The House and Tamarind in Barbados. Its Colony Club hotel is spread across six acres of tropical gardens with approximately 300 feet of beach frontage on the Caribbean Sea and lagoon style pools. Its Tamarind hotel is on the Platinum Coast. Its Crystal Cove hotel has three freshwater lagoon pools, two restaurants, two bars, two floodlit tennis courts and a fitness center. Its Turtle Beach property is on the south coast of Barbados. Its portfolio consists of over 550 rooms. more »

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  Is LON:FLYB fundamentally strong or weak? Find out More »

33 Comments on this Article show/hide all

Graham Neary 15th Jan 14 of 33

Thanks for the suggestions - lots of trading updates today, helps me to sort through them. G

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Effortless Cool 15th Jan 15 of 33

In reply to post #436473


EBITDA is a nonsense measure for a business like GYM (LON:GYM), which is required to invest in a huge inventory of depreciating assets (treadmills, rowing machines, etc.).

The fact that they continually choose to emphasise EBITDA, rather than profits, in their announcements, makes me suspicious, particularly since they also weakened their depreciation policy a year or so ago.

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Trident 15th Jan 16 of 33

Greece for many years has always had areas of elegance and beauty interspersed by places that are treated as a tip, or an untidy builders yard. This can often be experienced from the journey from the airport to the resort. It doesn't seem to have a particularly good sense of civic pride. In some ways it is a very odd culture to traditional European eyes.

Read Michael Lewis's: Boomerang! for a modest insight into some of the madness of the pre-bust Greece.

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Laughton 15th Jan 17 of 33

Just in case Paul is lurking, I wonder if he might be persuaded to share his thoughts on today's Update from Boohoo (LON:BOO) ?

Even though he may be feeling a little unloved over the past couple of days, I know that I'm not the only one here who would appreciate his take on one of his speciality companies.

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sbotting 15th Jan 18 of 33

Hi Graham, I'd also appreciate your thoughts on Cloudcall (LON:CALL)

In the trading update they seem keen to point out that they have enough cash available:

"At 31 December 2018, the Group had available cash reserves of £2.75m, made up of £0.9m of its own cash and an undrawn facility of £1.85m. Cash reserves decreased by approximately £1.5m in H2 2018, compared to £2.5m in H1 2018, and the Company is already well advanced in preparations for its 2018 R&D tax credit claim which is expected to bring in an additional £0.75m in mid-2019."

It looks like they should have enough cash (and ready overdraft facility) to make it through to break even and their broker is predicting that they will reach that point at the end of this year, provided they can maintain steady growth.

Although given Simon Cleaver's track record on over promising makes me sceptical. They started the year with ~ £4.9M in cash and they've burnt through £4M, it could be quite close.

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MBFP 15th Jan 19 of 33

Welcome back Graham.

It would be good to hear your opinion on the positive trading update from Kape Technologies (I hold) if you have time.


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Paul Scott 15th Jan 20 of 33

Morning all!

I like this morning's update from £CALL  (I have an existing long position, held for many years now).

It's been a good example of a jam tomorrow company which has taken far longer, and spent far more money (through repeated placings) to achieve its business plan. That's why the market cap is so bombed out, despite the company operating in a high gross margin, recurring revenue, interesting tech niche.

However, I think the company could now be near that lovely tipping point, where market sentiment suddenly changes from glass half empty, to glass half full.

Growth today is good, and accelerating in both Q3 and Q4, with positive outlook comments too. The company said that sales would accelerate in H2, due to its increase in overheads (primarily developing better product features, and S&M). Sure enough, sales have accelerated in H2 as promised, so mgt credibility should begin to improve.

Cenkos forecast from Sep 2018 (on Research Tree) shows losses being greatly reduced in 2019, from £3.7m in 2018, to £0.7m in 2019), which is driven by a strong increase in gross profit - remember there's huge operational gearing here, as organic revenue growth is strong, and it's achieving an 80% gross margin. So when profits do come, they could really soar after a few years. This is what makes this share so interesting, in my view.

Looking at the Cenkos figures, they show no increase in admin costs in 2019 over 2018, which strikes me as unrealistic. Since costs were cranked up during 2018, then I would expect the total in 2019 to be higher - as it's a full year of increased costs, plus wage inflation, etc.

Therefore, my view is that the Cenkos profit forecast is probably a bit optimistic, but I reckon the company is on track to get fairly close. Again, that's on my list of things to ask at the CMD.

What about cash? It's looking tight again - with only £0.9m remaining at end 2018. There is a £1.85m undrawn bank facility, but in the past the company has preferred to do a top-up placing, rather than going overdrawn. I suspect that might happen again this time. Maybe that's the underlying reason for this Thursday's capital markets day? To generate interest & increase the share price, ahead of another placing? I'll be attending the CMD this week, so will ask that question!

It only needs a top-up, so I reckon a placing of £1-2m would push it over the line, to breakeven & then profit. That's not really a big deal, as only 5-10% dilution, and with positive performance reported today, and a stronger outlook than we've had for a while, I think a small placing could be done fairly easily, if needed, and probably at only a modest discount. So for me, the low cash position is not a deal-breaker. Placings are only a problem when they're (a) big, and (b) from a weak position, e.g. after a profit warning. Neither is the case here.

My opinion - it's been a painful journey, but I think things are coming good here.

I'll report back if anything interesting comes from the CMD later this week.

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Graham Neary 15th Jan 21 of 33

In reply to post #436473

Thanks for the comment and the pointer - interesting entry point indeed. G

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sharmvr 15th Jan 22 of 33

Hi Graham,

Do you have any thoughts on the DOJ circular re the Wire Act, basically saying that online gaming ban is across the board not just on sports betting (My interpretation - not a lawyer!) given your holding in 888 Holdings (LON:888).

Share prices have reacted negatively across the sector (in what is already a beaten down sector) and 888 Holdings (LON:888) has taken the biggest hit - which I would presume is due to their dragonfish product, which I think is a key driver for why they have some fantastic quality metrics (notwithstanding lack of physical footprint) and that other operators (eg GVC Holdings (LON:GVC) have started in Nevada) whereas 888 is New Jersey based.
Notwithstanding the DOJ, I think dragonfish would have a much bigger market in the US (more entrepreneurial) and therefore I imagine a lot of people will set up their own sites looking for a white label solution.

Would value your tuppence - no position - 888 Holdings (LON:888) at 10x forward with a 6% divi is starting to get very interesting but obviously this price is likely with good reason.

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IGotPoesJacket 15th Jan 23 of 33

In reply to post #436438

Indeed this is a worry, I am of the personal opinion that it's not a coincidence that PLT is outperforming Boo and that the family has a bigger stake in PLT than core Boo.
I'm hoping the (relatively) new Chairman, Peter Williams can grab a hold of this issue and start getting all three brands treated with equal weight.

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Graham Neary 15th Jan 24 of 33

In reply to post #436623

Hi sharmvr, I've downloaded the DOJ circular but won't get a chance to read it until this evening.

I see the whole story in the US as providing upside optionality for 888. If things remain tricky over there, then I guess we have to make do with the European businesses. G

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DJCP 15th Jan 25 of 33

In reply to post #436508

@Effortless Cool (#15)

I've thrown the new numbers into my spreadsheet, and noted the 'Adjusted EBITDA', also includes Exceptional items and Long-term employee incentive costs (these two are an extra £2.4m for 2017).

Anyway, working back from this years £37m Adjusted EBITDA, and roughly doubling H1 costs, I have the following:
Operating Profit: £10.3m (2017: £9.9m)
Margin: 8.3% (2017: 10.9%)
Attrib. Profit: £6.8m (2017: £7.2m)

I think the expansion is going well, as shown by the KPIs, but hope they don't over-stretch. I would also like to see the debt being repaid, so revenue growth drops to the 'real' bottom line.

I sold 25% of my holding in December for 275p, and am contemplating when to re-purchase. Maybe <200p, or wait until March to make sure the results match my workings (or should that be the other way around ! lol)

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sharmvr 15th Jan 26 of 33

In reply to post #436633

It certainly does not seem to be priced as if it is going into the next phase of international growth in the biggest market around!
I read the first 4 pages - riveting!

Good effort with all the updates today!

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IGotPoesJacket 15th Jan 27 of 33

Boohoo (LON:BOO)

Re: the concern about Kamani creating an new brand

I’m no expert in legal matters, this post is a question not a statement.
The company I work for has put into my contract that I am not allowed to work for anyone else whilst I am that companies employment and unless I seek prior approval, any business I create will be considered owned by the company I work for.

Surely, there’s an expectation that if any of the senior figures were to do something like this they would have to make a clean break from any and all Boo group activities?

Would appreciate an expert opinion if anyone is prepared to comment or if any can point to examples where directors have set up rival companies to ones they’re directors of so I could have a look at what they did :)

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Graham Neary 15th Jan 28 of 33

In reply to post #436708

Safestyle UK (LON:SFE) vs SafeGlaze, Lancashire Holdings (LON:LRE) vs Fidelis.

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Golspie 15th Jan 29 of 33

In reply to post #436708

My recollection was that PLT was technically run by Kamani's children and the leaving of 35% with them was to incentivise them, but Paul's comment about Kamani or his children setting up another company is worrying

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xcity 15th Jan 30 of 33

I think the fears of a new BooPLT are overdone. PLT was built on the Boohoo infrastructure. As presumably Nasty Gal is now being. Not so easy to do it from scratch to this scale, even if you know how to do it.

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cig 16th Jan 31 of 33

In reply to post #436428

They still promise to pay the 1p in the announcement, the difference with the situation before is that shareholders have no real option to reject the deal now it’s just a cash shell with about 1p per share. The whole thing doesn’t feel quite right even though it may really have been that close to liquidation (in which case 0p would have been the likely outcome).

Bizarrely you can still get 2p on the open market apparently. Can’t figure out why. (I sold my holding yesterday).

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Dave_17 16th Jan 32 of 33

In reply to post #436733

I saw the other brands as a big future growth area not really discussed. Boohoo becoming a multiple brand white label platform. They have everything in place (maybe not the scale) to set up other non competing brands. They just need to sort out the commercial/financial structure properly and it could be a big upside. It would be very easy for them to set up a Sosandar (LON:SOS) on the platform. Also easy to stop if not a success.

Downside is if it works others could also set up a white label platform and bingo there's no barriers to entry other than stock and marketing. Which could wreck BOO and SOS

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 Are LON:FLYB's fundamentals sound as an investment? Find out More »

About Graham Neary

Graham Neary

Full-time investor and independent analyst. Prior to this, I spent seven years in the financial markets as an analyst and institutional fund manager. I'm CFA-qualified, also holding the Investment Management Certificate and the STA Diploma in Technical Analysis.Away from finance, my main interests are recreational poker and everything to do with China, especially Mandarin Chinese. more »


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