Small Cap Value Report (Tue 23 Jan 2018) - Quindell, ELCO, LPA, BOKU, EYE, FLO, SSY, VEL, LOOP, LAKE, DOTD

Monday, Jan 22 2018 by

Hi, it's Paul here.

Please feel free to post your comments, and small cap requests in the comments below.

Quindell postscript

This announcement caught my eye. The audit firm which signed off Quindell's dodgy accounts for 2010/11 has been fined £700k + £90k costs by the Financial Reporting Council (FRC). This obscure body supposedly polices published accounts. However it rarely seems to take action, and when it does, is very slow.

The audit partner responsible, has also been reprimanded (big deal!) and fined £56k - which is not a material sum of money to a partner in a decent-sized accountancy firm. Also, look at the timeline - it's now 7 years from those incorrect accounts being created. Hardly a rapid response team!

As longer term readers here will remember, I was consistently very bearish on Quindell, since its accounts were fairly obviously highly suspect. Excessive debtors, excessive capitalisation into intangible assets, and a flurry of acquisitions to muddy the waters, are the usual give-aways of fake profits, so these dodgy companies are really terribly easy to spot. You can spot a highly abnormal balance sheet in just a few seconds, so it really doesn't take any particular forensic accounting skills to uncover dodgy companies with false profits. You just have to have your wits about you.

The same was true with Globo. It was amazing how much venom from deluded fools in the investing community my bearish comments attracted over these 2 dodgy companies. There was even an attempt to get me sacked from this role at Stockopedia, by Quindell/Globo shareholders cancelling their Stockopedia subscriptions! Of course, Ed put editorial integrity before short term revenues, backing me to the hilt. That I was proven correct by subsequent events, was very satisfying.

Anyway, the perpetrators of the Quindell and Globo frauds are still at large, with their ill-gotten gains, having relieved gullible UK investors of hundreds of millions of pounds. As I sadly commented to an investor friend at the weekend, white collar crime in the UK very much does pay. The action taken by the FRC, reported today, is too little, too late, in my view, to properly punish, or deter, the same sort of thing happening again.

Kudos by the way, to Tom Winnifrith, for his tireless, obsessive exposure of multiple wrongdoings at both Quindell and Globo. People may not like his style, but he's…

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Elecosoft plc is a United Kingdom-based company. The Company is focused on providing software and related services to the architectural, engineering, construction and digital marketing industries. The Company’s software programs cover project management, construction site management, estimating, timber engineering, 3D design and visualization, and cloud-based digital marketing solutions. more »

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LPA Group Plc (LPA) is a designer, manufacturer and supplier of light emitting diode (LED)-based lighting and electro-mechanical systems. The Company operates through design, manufacture and marketing of industrial electrical and electronic accessories segment. It is also a distributor of engineered components focused on the transportation (including rail, infrastructure and aviation), and aerospace and defense markets. The Company supplies a range of original equipment manufacturers, including Agusta Westland, Airbus, Alstom Transportation, BAA, BAE Systems, Bombardier Transportation, Downer EDI, Eurostar, First Group, Hitachi, ITW, Kinki Sharyo, Knorr Bremse, London Underground, Siemens, SNCF, Stagecoach, Unipart Rail and Wabtec. It exports its products to Europe, Asia and Australia. Its products and service offerings include Lighting by LPA Excil Electronics, connector systems, electrical components, mechanical components, electronic modules and LPA Transport+ Support Solutions. more »

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Boku, Inc. is a carrier billing company. The Company provides its services to both merchants and carriers. The Company offers Boku Checkout, which is built for Web-based merchants. Boku Checkout is a turnkey payment panel, which works in any browser and displays Pay by Mobile options from various mobile operators across the world. Merchants choosing the Company's service can integrate once and begin accepting payments from virtually any mobile phone in the world. The Company also offers Boku Direct, which enables merchants to integrate carrier billing functionality directly into their billing system. It allows the merchants to process payments using their own branded checkout flow for both one time or recurring payments. It allows customers to use their mobile number to authorize their payment. Its platform is used in various digital marketplaces, including Google Play Store, Sony PlayStation Store, Microsoft Windows Store, Facebook Application Center, and Spotify. more »

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

81 Comments on this Article show/hide all

gsbmba99 23rd Jan '18 62 of 81

In reply to post #303163

Maybe I wasn't clear in the point that I was making since it was originally a response to a particular comment. I was trying to highlight the discrepancy between transaction processing costs for physical goods and for virtual goods.

Bango's investor presentation details how they get to 2% of end user spend on virtual goods. It is predicated Bango receiving a small share of 30% of the value of a virtual item being shared between the online store, the mobile carrier and Bango. Bango recently signed Amazon in Japan as a Direct Carrier Billing route and there's been much excitement at the prospect of Bango making 2% on Amazon Japan sales.

I was curious to try to work out what kind of margin Bango might be able to achieve if they were processing payments on physical items for Amazon. So I went looking for an online retailer to see how much they spend. I selected Zooplus because they were all online and because they disclosed payment processing costs as a discrete line item. Across all of their transaction types, the total cost they pay away to all payment transaction processing companies averages 1% of sales.

If Bango makes 2% on sales of virtual goods when 30% of the item's value is being paid away, what happens when only 1%, on average, is paid away in the world of physical goods? Can Bango make 2% if only 1% is available and they have to share it with others?

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Cockerhoop 23rd Jan '18 63 of 81

In reply to post #303193

Hi Paul,
Thanks for the prompt reply. I've messaged the team citing LPA (LON:LPA) & Ashley House (LON:ASH) as examples. I'd suspected it may have been MIFID2 related so hadn't raised earlier.


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fwyburd 23rd Jan '18 64 of 81

In reply to post #303178


I agree Gromley, for me that wording (immediate effect) created a question mark about him above and beyond the fact he was leaving.

Either management intended to convey this or their communication skills need improving, neither of which will encourage investors. Judging by the sp today (down 13%), others felt this too.


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threeputt 23rd Jan '18 65 of 81

2 comments on the Quindell saga immediately caught my eye, and my agreement.
I've backed Tom Winnifrith many times against those who dislike and diss him, he may not get them all right on the upside but his bear and fraud call are nearly all spot on.
I also have been involved in several audits through the years, although never at the helm, I can confirm how easy it is to pull the wool over the auditors eyes and allay any concerns, seen it many times

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peterthegreat 23rd Jan '18 66 of 81

Re: Pauls' comments on Boku
Thanks for the comments on Boku Paul. I agree with your conclusion that investing in Boku is indeed a high risk to reward proposition (of the type that you and I would often avoid.) However for me it is worth a small speculative investment as all the numbers are going so strongly in the right direction and this is also happening at Bango which works in a similar area to Boku so I guess the value of this sector is expanding rapidly. For example, transactions processed by Boku more than tripled to $1.7 billion in 2017. I'm not going to suggest that paid for research is accurate, but the fact that today's Edison comment is predicting a profit in FY19 for Boku suggests that there may be light at the end of the tunnel. I would have thought that the merger of Boku and Bango looks like common sense as they are both pioneers working in the same sector for whom profit margins are critical. The merger potential is perhaps one reason why Boku's US investors decided to list the company on AIM where Bango's shares are also traded. I also like the fact that the markets addressed are truly global and I favour Boku over Bango because it seems to have focused more on developing markets where the use of mobile phones to buy things seems to be more widespread. Finally I would note that I was unable to purchase Boku shares through Halifax Sharedealing or Hargreaves Lansdown but found that ii (ex-TD Direct) let me buy the shares. Halifax claimed that you could not keep Boku shares in a their nominee account so that is why they don't allow customers to deal in them which sounds unusual to me. I wonder if the difficulty in dealing is dissuading some potential private investors.

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vik2001 23rd Jan '18 67 of 81

@ Paul - as long as Trump is in power the US markets will not tank. The administration will do everything possible to keep the markets running / the tax cuts was another way of prolonging this run for them. Im going to be ready to sell when the next election begins. I'm not convinced that Trump will run again so I will be selling off during the run up to the next election.

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Aislabie 23rd Jan '18 68 of 81

In reply to post #303263

I have also decided to include Boku Inc (LON:BOKU) in my small group of highly speculative sucker stocks (in Stockrank speak). Clearly it is relying on (a lot of) jam tomorrow but I think the growth can continue. The convenience to the buyer of direct carrier billing will I believe grow massively even in those countries where a credit card is common. Can this growth turn into profit? I think that it will and possibly sooner than you expect.
Meanwhile I will try and keep myself grounded by re reading the clear guidelines to avoid risk at this level

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phoenixnight 23rd Jan '18 69 of 81

In reply to post #302873

Hi Ram

I’m with you. If you’re left speechless by Costis, I’d advise you to steer well clear of Quob Park, as it may hospitalise you. It’s a sort of “Son of Quindell” with a lot of familiar faces thrown in for good measure. No doubt it will attempt to float in time.

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matylda 23rd Jan '18 70 of 81

Paul - Always best to just to rest :)

As you know - Plenty of opportunities and best spotted with a clear head.

Wish you well on a speedy recovery.

Blog: Briefed Up
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Tanglands 23rd Jan '18 71 of 81

Paul, as an audit partner in a large firm I think if I may just put you straight on a couple of points. Audits for listed entities are no longer a "way in" and rightly so. Independence now means you can ONLY do the audit and that's it, no fees for anything else. You are correct that the fees are still to low and the regulatory risk of getting it wrong, although not a big fine you may say, is still not great. The £56k for the partner may not be huge but ther career path is now at best a little bumpy. As a fellow partner would you trust a person who just cost you a share of £750k plus reputational damage. Pulling wool over auditors eyes is in my view getting harder to do and will continue to get harder. Direct data analytics and interrogation of systems will make it harder to cover things up, not impossible but harder. Block chain technology will I think help. Now that's not bad, a note about auditing and I nearly got crypto currencies in it!

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Hedgecutter 23rd Jan '18 72 of 81

Nice update from FDM with a resulting 1.9% drop in SP. Any thoughts?

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Michael Billingham 23rd Jan '18 73 of 81

25,000 shares in Games Workshop (LON:GAW) sold at a price of around 2,467p this morning.
Does anybody have any background to this sale, it appears to have had an adverse effect on the price this afternoon?
I'm long.

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Gromley 23rd Jan '18 74 of 81

Eagle Eye Solutions (LON:EYE)

Paul, I liked your comparison between the old and new description of what they are.

I'm not totally sure if you were being rhetorical when you asked :

Why change something clear, to something opaque?

But I'll answer anyway :

"validates and redeems digital promotions in real-time for the grocery, retail and hospitality industries"  sounds like a 21st Century Green Shield Stamps [google it kids]

Whereas :

"allows businesses to create a real-time connection with their customers" is quite clearly a paradigm shifting business that you cannot afford to not be invested in.

I'm sorely tempted to give up investing in companies and become a commodities trader instead - I'm short Snake-Oil as there is a clear global oversupply at the moment.

Yes I'm trying (and probably failing as ever) to be witty, but I do seriously wonder whether this trend (which I do think is real) is another indicator of a late stage and over-extended bull market.

I've been 'cautious' for about 18 months or so, but I'm now tending towards 'gloomy'. The global economy is certainly not as parlous as some doomsters would have us believe, but equally I don't think it is as rosy as the indexes would indicate.

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jdnthomas 23rd Jan '18 75 of 81

re Boku (LSE:BOKU)
I think one thing which may have been missed with Boku is that not only is 40% growth in revenues over the whole year a pretty decent growth rate, but it is accelerating. At the half year revenue was up 21% so by my calculations that means H2 2017 was about 65% higher than H2 2016. I suspect that is significantly higher than they anticipated at the time of the float where I believe they were expecting to break into positive EBITDA on a monthly basis but not for the full half year.
If they are EBITDA positive that should mean they are at least fully funded (wonder what they will do with the $20m cash they raised on floating though...) and they are a lot closer to being profitable than (just to take an example) Cloudcall. Certainly look better value than BGO.

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cyberbub 23rd Jan '18 76 of 81

In reply to post #303363

"I'm short Snake-Oil as there is a clear global oversupply..."

LOL like it!!

Like saying "I'm long balloon manufacturers as the stock market pundits are supplying more and more hot air" :-)

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jonthetourist 23rd Jan '18 77 of 81

Well done Paul on battling through your list. Much appreciated.


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mojomogoz 24th Jan '18 78 of 81

US Market:

The move up does not seem to be euphoric like 1999 (no comment 1987). It is relentless and remarkable of course. Aside from excess positivity, two other rationales stand out as potential drivers IMO:

1) Expectations of meaningful inflation take-off so making real assets very desirable.

2) Looking back in history and a bit laterally, the US is exhibiting behaviours that are like a classic emerging market balance of payments and currency crisis. Throughout history run up in stocks start to happen before the BoP crisis is fully realised and then when crisis hits currency tanks and stocks zoom.

It may just be a grind towards euphoria fuelled by a highly financialised and financially supported economy where margins are very high by historic standards with relative lack of aggregate cyclicality so pushing up the P on the E. We haven't then hit euphoria and the economy globally just kicked into hear which means that euphoria is coming barring geopolitical shocks (its aint coming out of the financial system this time as matron is monitoring and managing closely).

I don't know what's going down. However, I am inclined to give more weight to 2 above than I though...and I have surprised myself in taking that opinion over the last few months. I remain deeply uncomfortable about US valuations, however if it is the BoP crisis route (or the US version of that which will be a little different) then I am inclined to think that US valuations are much less relevant on global basis than is normal and that the all important capital flow pump is not towards the US when panicky moments hit. There is of course market muscle memory and eurodollar market does functionally create a USD short so there will be some panic to USD but my point is that the duration and momentum to it will be weak...and over time we Pavlov dogs will learn to be less concerned about it.

I don't give 1 above a horse in the race as the catalyst...however, if 2 happens then inflation of course comes.

I hate to say it but I think the evidence is that China has won the war in the global economic-financial power fight. China drives the global economic and financial flows. This will become ever clearer over the next decade.

Word out :)

(Of course, all macro is a bit I could be wrong)

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Alex Rackwitz 24th Jan '18 79 of 81

In reply to post #302843

I would say definitely because gross margins (are not just down but) collapsed. Vague explanations in the release sort of make sense but its not clear enough and there is a risk they have taken on less profitable work as they've grown to service the mass aerospace market. IF gross margins recover, this will be a homerun. But there's a bit of info vacuum (and risk) until the company proves itself.

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Paul Burkitt 25th Jan '18 80 of 81


I have held LPA for nearly four years. I do not normally trade in micro stocks, but reading the trading statements in the past always made me laugh - not a good reason to invest! Trading statements like sales are "galloping ahead' do not normally feature in other companies trading statements. It appears that their profitability is very much subject to the mix of products being sold. Clearly the move to a new factory has cut the cost of sales, so even without much top line growth, profits are much higher. Probably previous periods were negatively by one off moving costs. Reading their previous narratives they not totally dependent on the domestic market, where one large train order can make a big difference. Its the sort of company the UK has too few of. Will continue to hold

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InvestedGeordie 30th Jan '18 81 of 81

In reply to post #303143

Hi Gromley,

Many thanks for your help on the Computacenter (LON:CCC) tender offer! I've tendered my entire holding at the Strike Price, and we'll see how much I'll be scaled back by. As you say, literally no point trying to bid high, and if over the strike price, you get nothing. As this will be controlled by the very large holders, the best I can hope for is the strike price in any given scenario.

Seems to be a bit of a pointless exercise!



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About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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