Small Cap Value Report (Tue 19 July 2022) - BOOM, MADE, PHTM, BEG, LUCE, SOM, HOTC, ITS, EYE

19th Jul '22 by Paul Scott

82 comments 9712 reads

Good morning! I hope you slept better than I did! Paul & Graham here with Tuesday's SCVR.

Agenda -

Paul's Section:

Audioboom (LON:BOOM) - I ran through its interim results last night. Can't say I'm impressed. Low margins, mean little operational gearing. The valuation looks much too high on fundamentals. Although it might be valuable to an acquirer, given that it's a significant player in the US podcast market.

Made.Com (LON:MADE) - online furniture seller puts out another profit warning. Big losses of £80m PBT now expected for FY 12/2022. It's running out of cash too, and hints at a placing being needed. Who would want to fund that, given current conditions? Looks too high risk now, of dilution, or worse.

Photo-Me International (LON:PHTM) - excellent interim results. This is one of my favourite value shares, and today's results, plus a special divi, reinforce that. I think the shares are at least 30% undervalued.

Hotel Chocolat (LON:HOTC) - Roland has done a write-up of today's near-50% crash in share price. But it's so interesting, I've looked at it as well, so we can compare notes later. International expansion has gone wrong, and big write-offs are needed. However, I think the strong balance sheet can absorb this. There remains a decent, growing UK core business. Broker forecast for FY 6/2023 is also clobbered by cost headwinds. Not a bargain yet, but it's getting there.

In Style group (LON:ITS) - poor results, and an increased loss is forecast for the new financial year. I can't see the point in this company being listed, and have given this share a wide berth since it listed. Is it a bargain? In a word. no.

Eagle Eye Solutions (LON:EYE) - 550p (up 4%) (£146m) [No section below] - a very good trading update. Looking at the note from Shore Capital, £6.5m EBITDA only turns into £2.6m adj PBT, and 7.6p EPS. Forecasts for the following year don’t look too challenging, although it says the pipeline might slow in tougher economic conditions.

This looks a very good little growth company, with really impressive clients, globally. But a PER of 72 times looks a bit scary. Maybe the company has strategic value to an acquirer, given that it is integrated into lots of big name retailers? It’s a really interesting company, and I…

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Tortoise investor

19th Jul '22

What I found encouraging from City of London Investment (LON:CLIG) is they are getting net inflows despite the turbulence - this had been a problem in the recent past and getting new client money now no longer looks like a problem. That for me was previously the main bear case on the share. The FuM performance was inevitable in the current market and actually is offset by the fact that the dollar is strengthening. So I thought this update looked alright especially as the dividend is still fantastic and well supported by the cash position even if EPS falls further temporarily.

i am also intrigued that you see the Palace Capital (LON:PCA) update as negative whereas I read it as a chance to get cash at or above net asset value which it currently trades very far below.

Tommy H

Photo-Me International (LON:PHTM)

We have to understand the difference between the UK large house home owner, and others. Especially so when you look at the Continent which is a big part of the market.

I would agree on the washing machines in the UK. There is one in our local garage, two machines, will start to have a check when I go past but with the dry cleaners closing just before Covid (so 8 mile drive to the next town) there will be a pick up on things like Duvets - remember the joys of babies being sick on them, and also agree with the dog towels (lots of them still around here) and horses etcetera, and no doubt things like the local football teams, where someone used to do several loads to get them through, one at the garage and the Better Half not in a grump has to be a winner.

Must mention to my sister, might be a solution for the youngest concrete covered site gear!

Tommy

abtan

National World (LON:NWOR)

I agree with you on the long term power of Sheffield Star/Yorkshire Post, etc...it's amazing how many links I'm being sent by friends from local newspaper websites during the current football pre-season.

On a separate note, thank you also for pointing me in the direction of Crestchic (LON:LOAD) a few weeks ago. A fascinating company, which seems to be in a sweet spot right now.

Cheers

Revs8

Photo-Me International (LON:PHTM) I hold

An alternative view:

The death of the photo booth has been over stated. Having done a selfie for my last passport I realised it woks have been much better to pay £5 and get it done properly.
The UK is the only country allowing selfies and there is talk that this is less secure than photo booth photos. There are new booths that include biometric data with photos. Making it less likely that other countries will follow the UK and it is possible the UK will reverse the decision to allow selfies.
The laundrette business is now over 30% of turnover and has excellent margins. The growth rate is significant. This is Zulu principal style growth where you get high margin growth at a low cost.
I’m not sure about the food business but it could be additional sales from existing sites and cuts out the high cost of employing someone.
The news flow is all good and the figures look excellent. In the current market environment I can’t find a better story and (not surprisingly) it’s my biggest winner since the market started going backwards last year.

sharw

Reach (LON:RCH)

I totally agree. They took over my local paper and ruined the online readability. The old site was a single column of nearly all local stories that could be sorted in order of when written or when last commented on. Now it is a total mish-mash with no order, different sized items splattered around. Less than half the items are local - click on "Child mauled by dog" and you find it is from a Reach local site hundreds of miles away. Then there is a large scatter of gossip - royalty, Gogglebox, Love Island etc. Just awful to try to read, so however good a case may be made on these boards I will not be buying their shares.

planetx

Crestchic is a great bet , I topped up quite heavily at 192 // 194 last week .

It is towards the top of a trading range right now , it may well punch though into a higher range but if I was you it may come down briefly in the late 180s but doesn’t stay there for long .

I couldn’t believe how tight there previous facility was , must have been a production nightmare and that explains the leadtime / backlogs .

With the new warehouse they should be able to reduce leadtime and vastly improve efficient production , hard to see them not building from here and having a strong next 3 years .

Personally I think they have underestimated their matket and in 3 years the new facility will be at capacity .

But as my old FD used to say “that would be a great problem to have “

KevinS1

A bit more scuttlebutt..

I recently returned from a holiday to the Alps where outside a very large Carrefour was a small building (like a garden summerhouse) containing at least 4 or 5 washing machines that always seemed to be in use.

Next to that was a small telephone box sized machine (for those that remember telephone boxes) which was a pizza vending machine and again it regularly had people using it. It seemed unattractive to me but my kids assured me that the quality is good (from their mates feedback).

It seems to me that there are enough people nearby that the demand for these services will continue and I suppose that the supermarkets are happy if it keeps people in their shops whilst also getting a small income from the space/lease, whilst Photo-Me International (LON:PHTM) will get prime sites and not have extensive lease costs like the old style laundrettes.

Based on the last two TU's/results I took the plunge this morning.

peterthegreat

Thanks for the link Yellowstone Advisory. Interesting to hear their many opinions although I guess you would expect them to be bullish about the microcap/smallcap sectors in which their funds are invested.

timarr

The UK is the only country allowing selfies and there is talk that this is less secure than photo booth photos. There are new booths that include biometric data with photos. Making it less likely that other countries will follow the UK and it is possible the UK will reverse the decision to allow selfies.

There are lots of countries where a digital photo can be submitted for a passport renewal.

In the US: https://travel.state.gov/conte...
And New Zealand:https://www.passports.govt.nz/...

And Ireland: https://www.dfa.ie/passports/p...

I'm pretty sure I've seen others too - Singapore, Taiwan, etc.

It would also be interesting to know what the "talk that this is less secure than photo booth photos" is actually claiming.

The original passport application must go through the traditional process - or involve a new one that includes facial biometric capture. When you submit the digital photo for the renewal they do a biometric check to make sure it matches the old one. Exactly the same process is run on a photo booth submitted photo so I don't understand how this is less secure?

Marmite

Hi Paul,

Fair point on the placing that helps makes sense of the very short term extension to credit. I viewed it as comforting for shareholders but now not sure how to take it. Sure it won't go bust in the next 6 months but it's obviously lost at least £5m more than it thought it would a few months ago. This may be even more given the debt position has also increased (unsure of typical cashflow position at this time of the year). It will be interesting to see how this unfolds. Its going to take a good amount of money and real revision of their strategy to turn this around, could this face say a 50% dilution? at 25m market cap? Potentially discounted?

I agree very poor management looking at it from the outside, Next (LON:NXT) faced all of the same headwinds but seems to be on well telegraphed even footed guidance.

RE. Mid market yes I suppose you're right. Perhaps the read across is less fashion facing and more towards staycations, garden furniture, expensive used cars, cafe horse containers etc I associate Joules (LON:JOUL) with countryware ('Barbour lite' - farms, countryside etc) all great benefactors from the lockdowns and the ensuing quest for space. People shifting back to items they've been unable to spend money on over the last couple of years, occasionwear, holiday clothes etc.

Michael C

Useful link, thanks. They mention specifically MTI Wireless Edge (LON:MWE), Accrol group (LON:ACRL), Avacta (LON:AVCT), and their list of holdings reads a bit like the SCVR which I suppose is what one would expect. I see they have spent a chunky sum on a PUT option over the FTSE100 at 6200 December 2022.

shipoffrogs

It fell a lot, then went up a bit.

colin1862

Paul's campaign on AIM research is starting to gain traction https://www.standard.co.uk/bus...

ken mitchell

I love chocolate but found Hotel Chocolat (LON:HOTC) chocolate so revolting that I threw it away. Maybe it’s just my taste buds, but it might be that a lot of others agree including perhaps foreign buyers weaned on very good quality chocolate brands or expensive high quality from small independents.

I seem to remember Paul Scott also disliking the taste of Hotel Chocolat (LON:HOTC) chocolate offering. Not a patch on far far cheaper Moser Roth and Choceur in Aldi and JD Gross in Lidl. And those £1 bars of Aero , e.g Shares with a movie, or Aero dark and mint peppermint or Shareo to make them smile bars, are in a different league too.Try blind tasting any of these against Hot chocolate offering and see if you agree?

So for that reason why alone I’m not tempted to check out Hotel Chocolat (LON:HOTC) as a potential buy just as Deborah Meaden won’t invest in a Dragon’s Den business she doesn’t like. Also I thought Thornton’s chocolate was also way superior, but they also struggled to turn it in to an Investment success.

National World (LON:NWOR) I was very attracted by the low valuation, 50% of book value, but was put off when I noticed that Harwood sold out in February. But I'm easily put off, I'm amazed I ever buy anything really. https://otp.tools.investis.com...

ridavies

Thank you Dulpesh. Re Made.Com (LON:MADE) yes I remember that. His justification for a recommendation at around 200p!!!!!was very superficial - his children liked it and they and their friends were buying the products. I remember at the time thinking that this guy really doesn't not impress me. Reminded myself to ignore him in the future.

RE Somero Enterprises (LON:SOM) and to all. I agree with all your comments, though previous history indicates it is cyclical. They have built a lot into their new unit in Wisconsin I think it is, so that should start to pay back in the next year, though that may also be when the backlog has unwound and the cyclicality comes in. A positive meets a negative. Just a thought. Heart tells me to buy more on weakness. Head tells me to hold some cash and wait.

yiannos1

I honestly think that it would be more useful to look at the balance sheet and the cash flow , than the heart and the head dilemma!

Cleeve

Paul thanks for the Boom analysis - very pleased to hear the other side, useful reality check

stevenhume

6th Aug '22

Luceco (LON:LUCE) Electrical compliance legislation was introduced in 2020 affecting 4.5 million UK rentals. There was a lot of electrical work done around that time. No doubt this would have boosted Luceco sales given that they have a significant UK marketshare. Not the only reason for a relatively poor 2022 but surprised the management did not factor this in to their forecasts.

Small Cap Value Report (Tue 19 July 2022) - BOOM, MADE, PHTM, BEG, LUCE, SOM, HOTC, ITS, EYE

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Paul Scott

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