Small Cap Value Report (Tue 17 Sep 2019) - FCCN, WTG, STAF, LOOP, TWD, CMA

17th Sep by Graham Neary

47 comments 7822 reads

Good morning,

There is a crazy supply of results today, I won't be able to cover everything. Let's see how far I get by mid-day.

This is as far as I got:

French Connection (LON:FCCN)
Watchstone (LON:WTG)
Staffline (LON:STAF)
LoopUp (LON:LOOP)
Trackwise Designs (LON:TWD)

French Connection (LON:FCCN)

Share price: 36p (-6%)
No. of shares: 97 million
Market cap: £35 million

Interim Results to 31 July 2019

One of the important things to bear in mind with this one is that H1 tends to be very weak, compared to H2.

Last year, FCCN achieved breakeven for the full-year despite an underlying operating loss of £5.5 million in H1.

This year, the company has made an H1 underlying operating loss of £5.3 million. A slight improvement. The company says results are in line with expectations.

Key elements of today's result:

revenue down 12% due to a reduction in floor space and lower wholesaling revenue.
number of operated stores and concessions down from 103 to 90
cash at £10 million (versus £12.8 million at the same time last year).

Retail Like-for-Likes

FCCN reports positive "retail and ecommerce LFL sales in UK/Europe" at 1.4%.

This is a tricky thing to unpack, because of the inclusion of ecommerce sales. Typically, when we look at Retail LfLs, we want the figure as it relates to stores only. Ecommerce is presumed to be available on a full national basis anyway, so the idea of making a "life-for-like" adjustment doesn't apply to it.

The company does report that UK/Europe retail space fell by 8.2%. It also reports that total ecommerce revenue "reduced slightly".

These facts being true, I am inclined to think that the store-only LfL figure for UK/Europe is positive, but it's not quite proven. A pity that we have to play with the numbers, instead of being told in simple terms how the stores are doing

The store on Oxford Street is now closed, as expected.

Remember what the bull thesis says (e.g. Paul in October): that when the worst leases expire, FCCN will be free to make good money from ecommerce, licensing and wholesaling, without the retail albatross around its neck.

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H1 2018

H2 2018

H1 2019

H1 19 vs H2

H1 19 vs H1 18

EUS (M)

220.0

338.2

467.2

129.0

247.3

Transactions Revenue

2.22

3.03

3.18

0.15

0.96

"Cut" %

1.01%

0.90%

0.68%

0.11%

0.39%

MBFP

17th Sep

Bango reaches profitability - just!
EUS more than double HY18 and doubled for last 5 years.
Rev up 64%
Adjusted EBITDA turns positive
Cash sufficient to reach cash generation
BGO continues to deliver according to its strategy.
Would be good if revenues progressed a little faster but going in the right direction and adding new cleints.
Also now has an extra source of revenue through data monetiztion.
I hold

davidjhill

Bango (LON:BGO) the key is in the second half.

EUS more than doubles so expect around £1.2bn for the full year (or £750m in second half). That means revenues should come in at around £11-12m for full year (circa 0.9% payment margin + some data business). Given operational gearing that in turn should lead to ebitda of £3-4m.

Leading into the next year you are looking at a run rate of £1.5bn + sequential growth.

Looks like Bango (LON:BGO) has finally breached the inflexion point.

Gromley

Yes the Bango (LON:BGO) results are certainly better than I thought they might be and they have reached their stated expectation of "profitability" (on their terms).

It looks more credible now that they could reach cash flow positive without having to raise more funds. They burned £1.6m in the half year and have £2.25m + 0.63m of tax rebates expected in H2.

In theory they have substantial operating leverage, so further growth makes a significant contribution to the bottom line.

They have been saying for some time (and still are) that their platform can support several multiples of the current level of business without expansion. It is strange then that they increased the platform capacity in the current year "to comfortably handle the short term peaks and surges in transaction volumes". So in fact to meet multiples of the current levels of business, they actually DO need to expand capacity. It reads as though they can do that at fairly low cost, but it is not quite the same as they have claimed.

Their definition of the profit number they have reached is "Operating profit before depreciation, amortization, share based payments and exceptional items".

That's not an uncommon measure of course, but the one thing that does leap out at me is that this therefore excludes £0.85m of amortisation of Intangible assets. Meanwhile they have capitalised £1.05m of spend into intangibles and despite claiming now to have a mature scaled platform, the figure was scarcely down on the £1.2m they capitalised in H1 last year.

Some of this will relate to their data analytics capability which is still developing, but we are not told how much.

Actual profitability still looks a way off to me, although the current Stocko forecasts suggest they will achieve it for the full year (not just H2) that would be impressive and then I might sit up and take more notice.

Good results certainly and an interesting proposition - but show me the money!

purpleski

Thanks Graham. A great article today; not that your others aren’t!

arfournier

I wouldn't touch £ LOOP with a barge pole. Zoom a competitor, which is listed on the NASDAQ, had revenue year over year increase of 96%. They are guiding for year over year increase in revenue next quarter of 72% and of 77% for the year. They are profitable and generate tons of cash with 17 million in Free Cash Flow generated last quarter. They are growing their client base and existing clients are spending more money with them. Revenue growth in EMEA and Asia was up 106% per quarter. So I am taking the Macro excuses offered by LOOP with a grain of salt. Personally, I don't think they are big enough to gain traction in their field and will continue their slow decline.

Mark Carter

The thing is, Amazon make only a tiny sliver of profit, and they also provide for the "long tail" (i.e. stuff that is more obscure, but for which there is demand nevertheless). It's very difficult for traditional business to compete with the internet, especially if they have to pay rent, rates, staff, utilities, etc..

hi Gromley

re Bango (LON:BGO) They should be profitable on a cashflow basis by year end on my calculations. EUS should at least double from H2 last year - around £700m and is on track.
I don't expect levels of investment and amortisation levels to change. I think this should be seen as broadly the norm and a genuine cost of business. They have to keep investing to a certain level, just that increasing levels of EUS doesn't translate into driving capex higher and thus operational gearing now kicks in.

Good couple of notes on Research Tree today, as well as Simon Thompson with the IC.

Zipmanpeter

"Personally, I don't think they are big enough to gain traction in their field and will continue their slow decline."

I think the decline in usage issue per existing user for £LOOP is probably real but the real question is the size of niche in the market for its product.

From RNS today - "Professional services customers now account for 68% of LoopUp revenue and a higher proportion of new business. The Group now works with 20 of the world’s top-100 firms and 24 of the world’s top-100 private equity firms".

For a narrow set of heavy customers then, LoopUp looks a great product. But sSuch a tight focus means there are always going to be swings up and down. What's more, with the big expansion of the sales force underway, they are quickly going to cover all the key firms in the vertical they clearly succeed in once they enter the geography; and these customers are clearly sticky with a churn in the order of 6% over several years now.

It should also be able to grow the user base but it does make them vulnerable to swings in demand/per user due to upswings/downswings in demand. Furthermore, these customers are not tied to using only LoopUp and so can use other systems like Zoom as well. Leakage is always a concern.

But is also worth pointing out they are also clearly not ZOOM (whose Mkt capitalisation is $22Bn and price is 442 X forward earnings , !!). In contrast LoopUp will be on a PER and a capitalisation of $56Mn and PER of 15 before today's fall. Personally, I would not touch Zoom shares !!

So the question is whether they can carve out and retain a profitable niche worthy of current price. My belief is that operational leverage and great financials are only a couple of years away. As ever, we will have to see !

Graham Hacker

Graham - I note your comments about putting more info in the headings. I’ve often thought about writing my own comment about RNS’s but unsure who to write to, perhaps you could provide some detail?

My issue has always been the use of in line with “market expectations” with no information what numerically it means! I think the expression puts PI’s at a disadvantage as most of us do not have access to broker data and why should we when an RNS should provide a level playing field to all investors! Rant over but grateful for any thoughts.

Ned Kelly

What has happened to £AVAP today. It looks as if Oakwood have sold a direct holding of nearly 25% into a derivative or am I not reading the Holdings announcement this afternoon correctly

I do get the sums David, but I'm just not sure if they really tell the picture.

It looks to me as if they have almost written off the original transactions business as something that they now give away in order to harvest data for the analytics business.

On the transactions business the increases in EUS are indeed impressive - doubled for each of the last 5 years (I think they said somewhere that they expect this to continue, which is insane).

But , they are giving it away now. H1 EUS was up 38% on H2 , but transactional Revenue was only up 5%. (EUS up £129m , Revenue only up £146k)

I do get the concept, but I have some concerns about the analytics business.

We do not actually know if it is profitable, the segmental breakdown only goes down as far as Gross Margin.
Is there a moat? Or are they fishing a small pond that will be muscled into by bigger players if it becomes worthwhile.
Is it 'moral' / facing future regulatory challenges.

I have only recently seen an explanation that made any sense of how they can make money in this space against the established player, it may not be the only way. But it is one that looks slightly "dodgy" to me.

They can help app developers identify which app users tend to make in game purchases and then provide those app developers with a targetted list of Facebook profiles to market too.

So let me get that straight :

Bango's global end users are predominantly those without bank accounts.
To grossly generalise, that demographic is less financially sophisticated.
They then narrow down that group that regularly ~~waste~~ spend their money on in-app purchase.
And provide people who want to promote sell more in app purchases are targetted 'mailing list' of these people.

I'll wager that such was not part of the original vision for the company.

There is far more to Bango than this and that is probably a very cheap shot, but it does remind me that I think I posted a few months ago, that decades ago I worked on a (much more primitive but) similar offering to Bango's which could have effectively enabled telcos to become 'banks'. What I probably didn't mention at the time (as it wasn't on topic) was that in the end a significant usage of the product was for the unscrupulous to attempt to scam the unsophisticated.

Sorry, that's me "going off on one"!!

Back a little more on topic, my key concern would be : given that the business now wants to be in data acquisition and analytics can they carve out a scalable, legitimate and sustainable business that can generate sufficient returns to pay for the legacy transactional product and deliver much return for shareholders?

Cash-flow positive and profitable at the full year would be a great step, but I'm not sure you can just project the numbers.

We'll see and actually I would like them to be able to carve out a legitimate profitable niche, but I'm still not convinced.

bryans1311

“Maybe stockopedia should just do a "quality screen" based on how long it takes companies to report their numbers?”

That’s actually an excellent idea! Also, there are a few quant geniuses that post on this site, I think could pull some excellent stats together on this. Hopefully they’ll read this :-)

melody9999

Ned - Oakwood heve reduced their holding in AVAP from 25.92% to 24.68%. Not sure it is anything to be concerned about

jonthetourist

18th Sep

The gobbledygook above was written on a train in China with very intermittent internet. My apologies!

No Twitter, Facebook or Gmail here, but Stockopedia seems to be acceptable.

Jon

smilingmickey

Hello John,
IHMO SPSY is well worth holding.
The cash generation/dividend yield are very attractive. The share price significantly undervalues the assets especially following the recent RNSs which provide information which will have a significant bearing on the future of the Company.
Too small and little understood even by the main writers of this blog.
"2019 full year profits will significantly exceed market expectations" is not often seen in a trading statement. I'm hoping that the share price will reach an all time when the interim results are announced shortly.
SM

Hi Gromley - the maths is wrong :) Revenue generated from processing EUS increased 43% to £3.18m on £467m EUS. They make around 0.75% on the transaction business as an average. They fired the house broker because, as I understand it, they previously suggested Bango (LON:BGO) would need to lower margins to sub 0.5% to keep EUS doubling last year and management disagreed. The numbers appear to agree with mgmt. At full year this should translate to £8-9m of EUS revenue based on EUS of £1.1bn+

The data is a bolt on but one that drives both additional revenue and encourages higher EUS through their platform, so it is actually a very logical thing to add to the business and appears to be doing well.
Businesses add complimentary horizontal and vertical revenue streams all the time - that doesn't make them bad businesses. Quite the opposite.

Also if you want an example of a company that started out with an unsophisticated product and kept adding more sophistication layers horizontally and vertically look at GB group : went from 20p to 500p !

19th Sep

Bango (LON:BGO)

I did exaggerate somewhat in saying they are giving away the Transaction element.

Although did themselves say a while back that they were accepting lower transactions margins in order to harvest data.

I hadn't appreciated that they sacked their broker from making a forecast that they didn't like. I don't really think I approve of that (especially given that only this week they significantly over spun the announcement re their move into the tolls business)

In fact arguably their old broker may not have been far off the mark, if you look at the half yearly figures :

	H1 2018	H2 2018	H1 2019	H1 19 vs H2	H1 19 vs H1 18
EUS (M)	220.0	338.2	467.2	129.0	247.3
Transactions Revenue	2.22	3.03	3.18	0.15	0.96
"Cut" %	1.01%	0.90%	0.68%	0.11%	0.39%

The effective growth has come at less than 0.5% of EUS. I do accept that is a something of a distortion given that they may well have reduced "margins" on the existing business and well as made low "margin" new sales.

That might still be a good thing to do as it does feed the data analytics business, for which the figures thus far do look quite impressive, I just personally remain to be convinced about the size and longevity of the opportunity.

Interested to see how it pans out and could even be a buyer at some point, but not for me at this point.

Paul Scott

20th Sep

Re French Connection (LON:FCCN) - I've only skimmed the figures, as have been on holiday in Malta this week with deliberately no laptop.

Mildly disappointing figures, but good outlook. Mgt tells it like it is, so I accept the reason as valid re phasing of wholesale orders into H2. As Graham points out, there is an inherent & sizeable H2 bias to profitability every year. So it is often the best time to buy FCCN shares just after the interim results.

Remember the share price is set by a handful of small traders - it's very illiquid, like so many small caps. Therefore the share price does not reflect value. Neither large buyers or sellers can transact in the market, so the price is largely artificial.

On a full year basis, it's now profitable, and it has a bulletproof balance sheet. Loss-making shops are gradually disappearing (Oxford Street was probably a huge loss-maker, by my rough figures, and it's now gone).

At this level, I think it's an easy, and very low risk way to (at least) double my money. Reason - that licensing & wholesale are a good, profitable business.

It's a tired investment idea, but that doesn't mean it's wrong!

Best wishes, Paul.

Housemartin2

21st Sep

French Connection (LON:FCCN). Like Paul, I looked at this in a similar way but the new shop in Duke St made my query the thesis. I agree with Graham on this (except I have not sold). My worry is that they will set up new shops using the much reduced rents as an example of a 'bargain' and remain wedded to retail. Generals are always fighting the last war.

clarea

Thanks Paul do you think Ashley could nobble any potential bidder by being awkward with a view to picking it up on the cheap himself, or does Marks hold enough shares to have the majority sway ?

Small Cap Value Report (Tue 17 Sep 2019) - FCCN, WTG, STAF, LOOP, TWD, CMA

French Connection (LON:FCCN)

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Graham Neary

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