Small Cap Value Report (Tue 25 Apr 2017) - BLTG, CPR, ABDP

Tuesday, Apr 25 2017 by

Good morning! It's Paul here, I'll be doing today's report.

For those who couldn't attend the UK Investor Show this year, the video of my session has now been published. I was asked to interview Nigel Wray & Paul Mumford, which was a real honour, and I thoroughly enjoyed it. As you can see, the format didn't work perfectly this time, so we'll tweak it for next year. Although lots of interesting points were covered, so it was well worth doing.

Also, I wrote a section on Mporium (LON:MPM) results yesterday, emailed it to Graham, but forgot to attach the file. Doh! Anyway, I've re-sent it today, so Graham has kindly added my section to his report yesterday, which is here.

Back to today's RNSs, there's lots for me to cover, so this article will be gradually updated throughout the rest of the day.

Let's start with a profit warning.

Blancco Technology (LON:BLTG)

Share price: 158p (down 26.9% today)
No. shares: 58.2m
Market cap: £92.0m

Q3 Trading Update, Cash Flow Review and Funding - an ominous-sounding title for an RNS.

This is a very unusual announcement. The first paragraph, surprisingly, says that everything is looking fine as regards the P&L;

Blancco announces that trading for the third quarter to 31 March 2017 ("Q3 2017") has been strong.

Group sales in the period were up 48% year-on-year on a constant currency basis, comprising 36% growth in erasure and 189% pro forma growth in diagnostics.

In the first nine months of the year, Group sales increased 34% year-on-year in constant currencies, with erasure growth now at 26% and pro forma diagnostics growth at 137%.

The outlook for full year 2017 sales and adjusted operating profit remains in line with market expectations.

So why has the share price tanked then? It seems to be down to a shortfall in cashflow, as explained in paragraph 2;

Since the interim results on 14 March 2017, the Company has undertaken a review of its cash flow forecasts.

The Company has identified that costs associated with past acquisition activity, including earn-outs and advisors' fees, the later arrival of a large government contract and the slipping of larger contract deals to later in this current quarter will all build pressure on the forecasted cash available to the Company during…

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Blancco Technology Group Plc, formerly Regenersis Plc, is a provider of mobile device diagnostics and secure data erasure solutions. The Company's segments include Erasure and Diagnostics. The Erasure segment focuses on development and delivery of solutions, and includes Blancco, which provides erasure software; SafeIT, which is engaged in cloud and networked data erasure business, and Tabernus, which is engaged in providing software erasure products. The Diagnostic segment includes Xcaliber Technologies, a smartphone diagnostics software business. Its secure data erasure solutions include Blancco Management Console, Blancco Cloud, Blancco File, Blancco 5, Blancco Mobile Solutions, Enterprise Erase E800, Enterprise Erase E2400, Enterprise Erase Mobile and Ontrack Eraser Degausser. Its mobile diagnostics solutions include fault diagnostics, repair and program enablement. It serves manufacturers, financial institutions, healthcare providers and government organizations across the world. more »

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Carpetright plc is engaged in providing floor coverings and beds. The Company operates through two segments: UK and Rest of Europe (comprising Belgium, the Netherlands and Republic of Ireland). The Company trades from approximately 440 stores and concessions in the United Kingdom, as well as over 140 stores across Holland, Belgium and the Republic of Ireland. The Company offers free home estimating services. The Company's product range includes carpets, mattresses, headboards, laminate flooring, engineered wood flooring, rugs, vinyl flooring, luxury vinyl tiles and flooring accessories. Its luxury vinyl tiles are available in a range of designs, including tile, oak, pine and stone. It offers a range of beds and bed products, including divan beds, roll up mattresses, bed frames and others. It offers a range of options from memory foam mattresses to open coil and pocket spring mattresses. Its brands include Kosset, Essential Value, Storeys, Carpetright Clearance and Carpetright. more »

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NEXT plc is a United Kingdom-based retailer offering clothing, footwear, accessories and home products. The Company's segments include NEXT Retail, a chain of over 500 stores in the United Kingdom and Eire; NEXT Directory, an online and catalogue shopping business with over four million active customers and international Websites serving approximately 70 countries; NEXT International Retail, with approximately 200 mainly franchised stores; NEXT Sourcing, which designs and sources NEXT branded products; Lipsy, which designs and sells Lipsy branded younger women's fashion products, and Property Management, which holds properties and property leases which are sub-let to other segments and external parties. Lipsy also sells directly through its own stores and Website, to wholesale customers and to franchise partners. The Company's franchise partners operate approximately 180 stores in over 30 countries. more »

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59 Comments on this Article show/hide all

Funderstruck 25th Apr '17 40 of 59

It may be different now but when I was there the Realtors did not piddle about with 11/2 - 2% commission but 10% or so and the marketing was a free for all , open to all affair, then once sold the spoils would often be shared with those who could show an interest; have Purp spelt out how they intend to tackle this market? I too will wait and see but I did like the slick Oz launch.

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nicobos 25th Apr '17 41 of 59

I'm selling chain-free place a place currently (in East London) and convinced my neighbour to also use the same local estate agent (in exchange for a better rate for both of us of course!). His property was previously listed on Purple Bricks for a month and he was just not getting the enquiries; a couple of time-wasters only whereas mine had an offer in two weeks. 

He assumed that as everything is online these days, it would work just fine. It turns out there is more to selling properties than just a glossy website! I found the value add to be in the Estate Agent's existing marketing lists built up over time, professional photos really made a difference, knowledge of the area and development I'm selling in and managing the whole process once an offer comes in.

So, the jury is still out on this sales model and whether they can actually 'own' the market or not. My feeling is that a lot of the weaker Agents who can't add value will go out of business whilst those who innovate and really know how to market your property properly (to get a higher sales value) will thrive; albeit they will feel some pressure on margins.

I'd love to cut them out of the process but unfortunately if you have a deadline to hit, it still feels like the lower risk model (no sale, no fee!) in a market which is fraught with the danger of deals falling through, especially as in London it's now a buyers' market.

The shares though will be a great 'trading' play as the story has plenty of runway yet before running out of steam; the key will be to not get too greedy on the way up and lock in some profits as you go!

On Blancco, as posted elsewhere, it sounds like there is definitely a lack of trust around this share and the management team currently. I hope the slipping of contracts is not another veiled profit warning for lower earnings later this year. Hopefully institutional shareholders can shake things up. Assuming there are tangible profits once all of the adjustments are cut-through, and a decent underlying business, there should be support from stakeholders.

 Here's my reading of what's happened:

 - March '17: CFO resigns; he has been in the business 6 months but clearly didn't have a proper grasp on cash-flow. By the time he realised what was going to happen (maybe he was relying on the Mexican debtor to pay the earn-out!?), his position became untenable. The Company has an internal drains up to try to quantify the shortfall.

 - Today: As the cash-crunch is imminent and there isn't time to get Banks to put a short-term facility in place (i.e. there is a risk the Company literally runs out of cash!), they are forced to qualify in a market announcement. I assume they are working behind the scenes to get this cash and are confident of doing so (otherwise this would be a rights issue announcement).

My thesis is that the £4m is a one-off (having gone to the trouble of quantifying, you'd imagine they are now all over the current liability requirements for next 6 months) and that once sorted, the share will gradually start its positive moves.

There is a risk however of further profit warnings and delays of contracts. Again, this is where the trust in the management team seems to be lacking.

Worth a small punt (in today at 158p) at imho as I believe the institutional investors will support and the fast growing top line in an attractive market makes it a compelling acquisition target for some far larger trade players if the EV slumps (acting as a floor on the share price).

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jonesj 25th Apr '17 42 of 59

I bought Purplebricks in December & exited recently, considering the high valuation & director sales. It looks like a promising growth business, but the market cap is about 20x expected SALES for the current financial year.
I'm not sure if they will grow into that valuation.

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paraic84 25th Apr '17 43 of 59

In reply to post #181005

Countrywide, the biggest UK estate agent (I think?), has been moving online. BUT because it is made up of franchises it is effectively setting up lots of online estate agents for particular areas*. That seems like a very poor response to me. I can't remember who said it on here before but existing incumbents are often poor disrupters of their own business model. The existing estate agents all have fixed costs in the form of offices which could become millstones around their necks when competing with Purplebricks (LON:PURP). The slowing housing market is also a problem for them as it will reduce their financial flexibility further.

*One of the biggest franchises is Bairstow Eves, an existing agent in the East of England (maybe elsewhere that I'm unaware of), which has launched an online offering (sell *from* £995 they say) and I have seen some advertising around but nowhere near as extensive as Purplebricks (LON:PURP). Worth keeping an eye on as an established player, but as yet it's not a serious contender and ultimately competing with other parts of Countrywide!

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paraic84 25th Apr '17 44 of 59

In reply to post #181071

In the short-term it might look expensive. But given this is becoming a global estate agency with a marketing budget larger than Countrywide's entire revenue last year, at £800m market cap this could be a cheap entry point if it ends up being valued £5bn-£10bn. There is a trading update on 4 May so maybe wait until then to see if the growth is continuing? As Paul says, expensive stocks like £ASOS have always looked expensive. So it might be the case with Purplebricks (LON:PURP).

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herbie47 25th Apr '17 45 of 59

In reply to post #180951

I'm not so sure, the problem is their pie is getting eaten not just by Purplebricks (LON:PURP) but other online agents as well, I have read that Purplebricks (LON:PURP) is now the 4th or 3rd largest estate in the UK. Rates in many towns have shot up. They seem to be getting squeezed both ways, also fees are falling. I don't think it's just London, probably most of the South East which is about half the country. Here are some figures for 2016: South East, with an overall average price of £377,902 was more expensive than nearby East of England (£314,648) but cheaper than London (£580,330).

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paraic84 25th Apr '17 46 of 59

In reply to post #181047

Purplebricks (LON:PURP) does have agents. They argue that unlike other estate agents they are able to focus entirely on helping the selling process because they don't spend their time trying to drum up business (which is done through their central marketing spend). I have no experience to verify whether that's actually the case. At the moment they cover larger areas while the business is growing so perhaps their time could be more stretched in helping sellers to cope with demand?

p.s. I see Paul has noted indirect experience above which is interesting to note. Could be the main risk here where someone needs an agent involved. I think a lot of people are cynical about how much value estate agents actually add though. 

p.p.s. I love all the debate on here. So useful for helping to inform decisions!

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Michael Mortphew 25th Apr '17 47 of 59

In reply to post #181068

Your experience of selling a property is interesting. One might have expected that in London people are so desparate to find anything at an affordable / sensible price that all leads would be followed up instantly, i.e. that an on-line/mobile approach would work well. By contrast in the North East where I live, 'bog standard' housing can be very slow to move. One friend has had his house on the market for nearly a year and another took several months to get an offer.

On that basis you could see that PurpleBricks wins both ways. Where the market is very bouyant and people are desparate to buy, the online advertising can have an almost instant impact. In less bouyant / affluent areas the property is 'findable' with minimal outlay and effort.

If people are moving to an area that is unfamiliar to them, all the other information they might want about schools, crime statistics, transport, council tax ... is on-line, so it's easy to imagine that over time almost everybody will start their property search this way. How long before they start providing 'drone' videos of houses, neighbourhoods? As others have said here, it's potentially an Amazon style, 'Winner takes all' market.

I'm not a holder of PB or any other estate agents.

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herbie47 25th Apr '17 48 of 59

In reply to post #181077

I know Bairstow Eves, think they are more south east than east, certainly around Essex but have not seen them further north, (you can probably guess their nick name). I have had viewing with Abbotts which is part of Countrywide, I think they were useless, one property I viewed had only 3 photos, one of the front of the house from an angle, one of half the kitchen and one of the bathroom, all were very poor quality and I don't think a floorplan. How can you market a property without even a photo of the living room or bedrooms? No wonder it was on the market for over a year and then taken off unsold. So no traditional agents don't always add value. So I would not touch them with a bargepole.

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gsbmba99 26th Apr '17 49 of 59

For those interested in how the economics for Purplebricks (LON:PURP) LPEs work, there's a useful comment from someone who went through the interview process here ( Search for user name AWKPSL.
"They start you off with a basic salary of something like £2k for a couple of months while you get started. You then earn money from various means including acquiring the listing from valuation appointments, getting the property sold and selling professional photography and floorplans to the seller. This works out at a few hundred per listing. You then also earn an additional couple of hundred from the buyer side if you successfully refer insurance, conveyancers and mortgages etc. I think the cap per property was something like £550. They aimed to do something like between 15 to 20 sales per month but said there were people working hard to manage 20 to 25. On that basis you’d have something like £99,000 by selling all the products every time, and for that high achiever they’re earning around £165,000. So it’s very much product referral based."
I've read elsewhere that the LPE gets a fixed fee of £200 ish per instruction (outside London) which fits within the above. If the objective is to generate 15-20 instructions per month that means the LPE can only afford to spend about a day with each customer. That doesn't seem like a lot of time.

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pgs501 26th Apr '17 50 of 59

For me the reason the real estate industry is ripe for an internet based solution is because the current incumbents have set the bar so damn low. Rightly or wrongly they regularly come near the bottom of surveys in terms of trusted professions and their customers almost expect them to try to rip them off, do a half arsed job, or just disappear entirely. Secondly it is a very fragmented industry all around the world where a large, centralised, online only agent could clean up. Thirdly as, at least in the UK, housing is seemingly a national obsession and selling a house is not seen as a very technical thing to do (we all just rightmove right?) customers get pretty pissed off to pay a £10k+ bill for this.

In this industry I can see the internet really taking over. That combined with the internet being a winner takes all environment is by I am long Purplebricks Purplebricks (LON:PURP) (although a small position as it can all fall over at this valuation).

Anecdotally when I was buying a house recently we went to around 20 viewings (all from traditional estate agents) and we had experiences including: mass viewings (20+ groups) where we had to queue outside for 20 minutes to even get in, agent forgetting keys so we had to wait while they got them, agent turning up in pyjamas, tenants not being told prior that viewings were happening, and finally agents not bothering to turn up but rather getting the seller to show us around (which we did actually prefer but hardly filled us with confidence in the agent).

These did not strike me as incumbents who were at the top of their game.

I believe that for every bad review about Purplebricks there will be many about the traditional agents, but at least Purplebricks is at 10% of the price...

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Julianh 26th Apr '17 51 of 59

In reply to post #181056

Re: Ab Dynamics (LON:ABDP)
Many thanks bestace for your very thorough, detailed and informative analysis of the ABDP interims. The highlight reports lots of good metrics including an increase in adjusted EPS - up 4.9%. You have to read down to the bottom of the statement of comprehensive income to see that reported EPS has dropped by 36%.
Most companies seem to report adjusted figures these days but some at least give a clearer explanation of the adjusting amounts and an explanation of whether they are truly one offs rather than ongoing costs. To present the good figures and hope we don't see the underlying reality does feel like an attempt to bolster the share price by deceiving the people who own the business.
Which makes your detailed analysis of the accounting for the share options payments all the more helpful.
I sold at 8:30am this morning after reading the RNS. I will keep ABDP on my watchlist and may buy back in if it becomes clear that the adjusted results really are a better reflection of the underlying performance of the business. But my first feeling is that Paul is (as usual) right. Share based payments are a way of paying staff and therefore need to be included in the p&l.
If you are willing to say, I would be interested to know whether you took any action after reading the RNS? Do you still hold?
Many thanks

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bestace 26th Apr '17 52 of 59

In reply to post #181149

I've never actually owned shares in Ab Dynamics (LON:ABDP), it's only ever been a watchlist share for me, and it shall remain there for the time being.

It's clearly a high quality business with a share price to match, but notwithstanding all the money they have just spent on increasing capacity, I wonder how close to their ceiling they are given that they already have something like 85% of their addressable market, so I'm not sure there is a long flightpath of growth opportunities in the long term. Indeed given how the company suffered in the last downturn, it would appear to be a cyclical business, and recent indicators on the health of the global auto industry have not been great.

Maybe all the technological developments (driverless, electric cars etc.) will provide a cushion against cyclicality as far as ABDP are concerned, but I wouldn't bank on it, and they have not yet been through a downturn since they listed.

And now we have the half year results which I think leaves something to be desired as far as their communication is concerned: no explanation in the narrative about the drop in reported profits, no acknowledgement that the cost of the share options is a rather large chunk of the profits and no explanation of the drop in gross profit margin. I hope this economical style of reporting isn't going to be characteristic of the new CEO's style, particularly with the founder/chairman moving towards retirement.

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Effortless Cool 26th Apr '17 53 of 59

I have started a thread on the valuation implications of share-based payment costs, using ABDP as a case study, here:

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MGinvestor 27th Apr '17 54 of 59

In reply to post #181212

Hi Bestace,

Thank you for detailed posts on Ab Dynamics (LON:ABDP) I wanted to ask about this comment:

" I wonder how close to their ceiling they are given that they already have something like 85% of their addressable market"

Where did you get the 85% figure from?

Much appreciated

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bestace 27th Apr '17 55 of 59

In reply to post #181608

It came from a piworld presentation from last November (jump to 42:08).

Also, this Shares magazine article from August 2014 quotes a figure of 80%.

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WhaleHQ 28th Apr '17 56 of 59

I wonder how they will compete with autonomous cars surely such advancements threaten to render their robots redundant?

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herbie47 28th Apr '17 57 of 59

In reply to post #181812

Why, maybe they will need more testing on such vehicles?

They also do developement of driverless cars.

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WhaleHQ 28th Apr '17 58 of 59

In reply to post #181839

I don't know much about it but it's seems like a lot of companies around the world will be investing in driverless technology over the next few years which I assume might render the requirement for a driving robot redundant. I didn't know they were involved in the development of driverless cars but again I think it's going to become quite a competitive area over medium term.

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herbie47 28th Apr '17 59 of 59

In reply to post #181875

Yes maybe but Ab Dynamics (LON:ABDP) seem well placed to be part of that testing as well. I feel driverless cars will not come in for at least 10 years and even then it will be slow just like electric cars. So I think drivers will be around for at least 20 years. As I said before I have sold my Ab Dynamics (LON:ABDP) shares now.

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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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