Small Cap Value Report (Tue 16 Oct 2018) - G4M, FOOT, DOTD, BPM, SMRT, IGR

16th Oct '18 by Graham Neary

43 comments 10900 reads

Good morning!

Some updates worth looking at today:

Gear4music (LON:G4M) - interim results
Footasylum (LON:FOOT) - half year report
dotDigital (LON:DOTD) - preliminary results
B.P. Marsh & Partners (LON:BPM)
Smartspace Software (LON:SMRT) - half year report
IG Design (LON:IGR)

Gear4music (LON:G4M)

Share price: 500p (+4%)
No. of shares: 21 million
Market cap: £105 million

Gear4music (Holdings) plc, ("Gear4music" or "the Group") (LSE: G4M), the largest UK based online retailer of musical instruments and music equipment, today announces its unaudited financial results for the six months ended 31 August 2018 ("the Period").

Paul has provided lots of coverage of this share - see his piece for the September trading update.

Key points:

Revenues up 36% but competitive pressure reduced gross margins, so gross profit is up by just 23%.
Own-brand sales grew at a slower pace than 3rd party sales (I value own brand sales higher than 3rd party sales, so I view this as a negative).
The move to the new distribution centre in Sweden is going according to plan
Trading is in line to meet full year expectations, due to very strong revenue growth so far in H2.

The company's confidence in the full-year result has evidently produced some firmness for the share price today.

Despite the loss suffered in H1, Equity Development has published a note suggesting that full-year net income could be £1.9 million, on the basis that gross margin will recover in H2.

Remember that there is a very heavy weighting of sales to H2, so it's the H2 result that really matters.

This bit is important:

Efforts are on-going to improve gross margins including negotiations with certain suppliers, potentially removing very low margin products, and taking advantage of any tactical buying opportunities as and when they arise. Early indications in FY19 H2 are that gross margins are improving.

I have a few concerns:

The company is changing its accounting year end-date (probably for good reasons, but I hate dealing with accounts that aren't for 12 months!)
Lower gross margins could be a recurring threat to profitability, if not in H2 then in H1 next year.
Software development costs are being capitalised faster than amortisation (£1.1 million…

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Wimbledonsprinter

16th Oct '18

Smartspace Software (LON:SMRT) is an interesting company, which I used to own but sold out earlier this year on its delayed FY18 earnings report (which was delayed for the finally sensible reason it was selling its dominant Redstone business). The pluses for the business are: 1) its attractive valuation when the cash is stripped out); 2) its flexible workspace software seems in an attractive market and 3) the CEO (previously chair) can point to the development of dotDigital (LON:DOTD), where he is also chair. Therefore, I was looking forward to today’s results as a chance to buy back in.

But I found today’s announcements underwhelming and have held off. The acquisition in NZ, seems to add complexity for a microcap and if problems occur, it will be difficult to manage at a distance. Then the existing software business’s growth has been negative in the first half (without any proper explanation, although there are positive comments for H2). Finally, I just can not understand the changes in working capital in the half-year figures - where the increases in receivables and payables in the half are not easily understandable.

SundayTrader

Good point. Just to be clear, I hold.

matylda

Well Paul and Graham much appreciate your thought on £G4M (and other stocks) as always.

I have long been in the camp where I saw no value in £G4M based on the simple metrics I use, mainly based on price being fair when the PEG is 1.

Anyway, I reckon there is decent value to be had here now in this growth stock, I will try and explain as below (price was 505p at the time)...

Hope it is of potential interest to you and or others.

(Sorry - Don't know how to post a smaller version of the screen shot! Think you have to right click and open in a new tab or something like that)

Nick Ray

If you want to change the size of an image, left-click it to "select" and then drag one of the handles that appear at the corners.

You might need to be in the "text editor" mode first (option in top right)

DMG2305

Matylda,

Sorry for the dumb question but are you saying there is 29% downside from today's price whilst maintaining there is value to be had? I must be missing something.

DG

Thanks Nick - That should also help make things a little clearer for DMG2305 and others - Where I expect for a -29% downside there is a potential 100% upside (of course it's based on my simple PER forecasting valuation type method).

Cheers again, helps a lot.

Vsihv

Matylda,

At the risk of being thick, is the analysis saying that the PE multiple should equal growth rate (to get to PEG 1)?
To get to parity PEG price (if I understood correctly) should we not use 2021 growth?
Clearly missing something obvious here (which I think might be) that we are using today price on 2019 estimate and therefore by definition we are also using the forward growth rate.
Thanks
V

purpleski

Hi Paul

Thank you for your comment on G4M. If you have time would you be able to expand on what you think it is that you see that the Stockopedia algorithm doesn’t. This is in the context that Stockopedia gives the company a StockRank of 7 and classifies it as a sucker stock, which you patently are not.

Ignore my question you have addressed this in your post to Graham.

It is not for me and I will sit this one out but hope you are right

Thank you.

Michael.

danielbird193

Thanks for the comments on B.P. Marsh & Partners (LON:BPM). For what it's worth, I'm a happy holder and also struggle to understand the discount. It looks like a bargain at current levels, although I accept that it sits in an under-researched niche and will probably never trade at a premium given the 'key man' risk with Brian Marsh himself so critical to the business.

Just to add to the thoughts here, I note than an RNS came out after market close today showing some small but significant director buying following today's results. That's a comforting vote of confidence in future prospects.

Fangorn

Revenue guidance on "next generation products" was disappointing - a cut to £900m,from £1bn with Japan a problem. Same place as PM is having transition issues of smoker take up rates of Iqos.

Smoking rates continue to decline.
(offset by tobacco companies by rising prices/margins so far)

Moves to Cannabis might provide a useful uptick. Altria rumoured to be looking at such.

Hi V,

Basically yes, so in this case...

2019E
Current Price = Obvious
EPS Forecast = 2019E EPS
EPS Growth Forecast = The growth rate from the last reported EPS to the EPS Forecast
PER (based on the price above) = Current Price / EPS Forecast
Target Parity PEG Price = Price based on a PER of the EPS Growth Forecast figure (39% = 39 and a theoretical PEG of 1)
Upside/Downside = Difference between the Current Price and the Target Parity PEG Price

2020E
Parity PEG Price from last year = The Target Parity PEG Price from 2019E (so, assumes price ends up relating to a PEG of 1)
EPS Forecast = 2020E EPS
EPS Growth Forecast = The growth rate from the 2019E EPS Forecast to the 2020E EPS Forecast
PER (based on the price above) = The Parity PEG Price from last year / 2020E EPS Forecast
Target Parity PEG Price = Price based on a PER of the EPS Growth Forecast figure (69% = 69 and a theoretical PEG of 1)
Upside/Downside = Difference between the Parity PEG Price from last year and the Target Parity PEG Price

Sorry if this is confusing, do please throw questions and I will do my best to answer. I know it might seem complicated but it's my simple way to determine if there is potential value within a growth story.

It takes me about 5 minutes to run through this quick high level drill when I spot potentials.

bestace

£G4M. From the Admission document:

"The ongoing development of Gear4music’s own-brand product range has been a focus of the Group’s strategy since it was established in 2003"

From the FY17 finals:

"Own-brand products continue to be a key component of our success and I am extremely pleased with the progress we have made"

From the FY18 finals:

"Last year we reported on good progress made in our own-brand business and own-brand revenue growth achieving the Group's ambition of keeping pace with the growth in other-brands"

So far so consistent. Today, Equity Development are saying this:

A narrower H1 gross margin can be partially explained by Gear4music’s strategy to gain market share in branded goods, where price comparisons are more transparent. The company’s efforts were rewarded with a 40% gain in branded revenue growth relative to a 26% advance in own brand product sales.

So they are deliberately moving the sales mix away from higher margin own-branded goods towards what they describe as "a highly competitive other-brand market"

That sounds to me like a failing strategy dressed up as PR spin, or if it is a genuine change of strategy it surely deserves a bit more discussion and explanation about the reasons behind the change.

Calcs make sense - thanks. Great having a new first look technique.
Would suggest you are asking a lot from multiple expansion, but would favour companies where growth is increasing, which I hear is no bad thing!
Thanks for the note.

Paul Scott

Hi purpleski,

Thank you for your comment on G4M. If you have time would you be able to expand on what you think it is that you see that the Stockopedia algorithm doesn’t. This is in the context that Stockopedia gives the company a StockRank of 7 and classifies it as a sucker stock, which you patently are not.

Sometimes the computers spot things that we don't. And sometimes we spot things that the computers don't.

We're all trying to foretell the future, which is clearly fraught with risk.

Regards, Paul.

17th Oct '18

Thank you.

Regards

Michael

I am not sure about 8 years is unreasonable from personal experience. I had my site (well ex-my as I sold the company recently) redesigned in 2015 and the site is certainly good for another 2 years but probably 4+.

The database was first designed (table relationships and overall principles) about 18 years ago and then implemented in MS Access. Yes it was tinkered with at the edges for about 12 years but the main development cost lasted 12 years. It was then converted to run via a browser front end but some of that original development cost from 2000 is is stilling being “used” today.

So while my site/backend was not supporting a heavy duty e-commerce web site I think it possible that G4M’s experience maybe the same. The changes one sees now are more likely to be incremental rather than wholesale. I feel that Amazon, EBay sites etc havent really changed in a decade!

That said G4M is not for me, as I don’t really understand the market. I hold Boohoo (LON:BOO) as while not a teenager (far from it) I can see how much they spend on clothes, how often and many there are of them. I dont have the same insights in to musicians.

dgold

Maybe the answer is that they have an ambition for own-branded to keep up with branded, but this isn't going to be a reason to not work on increasing branded where they can, even if they can't increase own-branded as much.

simoan

All the Stockrank is saying is that currently the omens are not good. And it's hard to argue given the current fundamentals - at the end of the day it's just a low margin distributor. It would be interesting to know how many companies with a Stockrank of 7 ever amounted to a good investment? I bet it's not many and that's what the computers are saying. Of course, there are always outliers... Personally, I have no interest investing in outliers.

All the best, Si

Gromley

All the Stockrank is saying is that currently the omens are not good.

The StockRank is not even saying that. It is simply saying that on average stocks with similar "factors" go on to underperform against the market (and more often than not in real terms).

Some (few) Sucker Stocks will go on to give massive upside, in fact I would surmise that a majority of the super performers will have gone through a sucker stock phase.

The simple fact is though that you need a significant edge to make money investing in sucker stocks, whereas if you select Super Stocks by throwing darts whilst blindfolded you'll probably do well.

The StockRank is not even saying that.

Isn't it? It's my understanding the Stockrank is largely calculated based on historic information using the most recent results. That's the reason it has jumped to 17 now and is no longer a "Sucker Stock" after factoring in yesterday's interim results. So that's pretty current and things are looking up!

I'm sorry, but to be honest, I don't really want to get involved in a discussion about Stockranks, as like Paul I don't really use them because I have no interest in factor type investing. I think the StockReport pages are excellent and present 90% of the information you need to judge a company so clearly, but the Stockrank, Style etc. is only of very passing interest to me, and I certainly would never invest (or not) based on them.

FWVLIW I agree with Paul that G4M is a better bet than it's Stockrank probably implies but I think the rating is nuts for a box shifter with crap ROCE and margins < 3%.

Small Cap Value Report (Tue 16 Oct 2018) - G4M, FOOT, DOTD, BPM, SMRT, IGR

Gear4music (LON:G4M)

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Graham Neary

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