Small Cap Value Report (Tue 3 August 2021) - BLV, COG, NWF, JOUL, RST

3rd Aug '21 by Paul Scott

95 comments 9998 reads

Good morning, it's Paul & Jack here with the SCVR for Tuesday.

Timing - today's report is now finished.

Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to cover trading updates & results of the day and offer our opinions on them as possible candidates for further research if they interest you. Our opinions will sometimes turn out to be right, and sometimes wrong, because it's anybody's guess what direction market sentiment will take & nobody can predict the future with certainty.

We stick to companies that have issued news on the day, with market caps up to about £700m. We avoid the smallest, and most speculative companies, and also avoid a few specialist sectors (e.g. natural resources, pharma/biotech).

A key assumption is that readers DYOR (do your own research) - don't blame us if you buy something that doesn't work out. Reader comments are welcomed - please be civil, rational, and include the company name/ticker, otherwise people won't necessarily know what company you are referring to.

Individual company discussion

I've been getting frustrated because we don't have anywhere to chat about, and swap views & information (press articles, etc) on individual companies. Everything tends to get sucked into the SCVRs, and then can be rather scattered about.

So I thought we would trial having some individual company, general discussion threads, to have a single place for general chat about companies. Instead of having to delve into the dreadful negative energy of other free bulletin boards elsewhere, where the default attitude seems to be replying to any posts with personal attacks on the poster! We can do better than that here.

Here are the trial threads I've set up for 3 companies which I like to chat about. I'll still report on them in the SCVRs on relevant trading updates & results statements, these threads are for anything else (and we can cross-link them on results days). I have personal holdings in all 3 of these -

Sosandar (SOS) general discussion thread

Saga (SAGA) general discussion thread

Revolution Bars (RBG) general discussion thread

If people like the idea, then we can extend it to any shares you want. Readers can set up your own threads of course, feel free to use the same title format.

Hopefully this way, if we use these threads, we can…

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timarr

3rd Aug '21

Thinksmart (LON:TSL) Simon Thomson in the IC also likes these

Remember that Simon Thompson's response after the Globo fiasco, which he tipped right up until the scam was confessed to, was that he had the right to rely on the information the company published. Given that Paul Scott had been calling this as a scam for months based on the accounts I thought that was pretty poor.

There's no indication in the ST commentary that he's taken into account the low valuation placed on Clearpay by Afterpay or sought to explain it. I'd be extremely wary of taking that as gospel.

Rusty2

Simon Thompson is very basis, I remember some of his postings on Globo, he was only reporting the positives. That's the difference between IC tipsters and Stockopedia, you get a much more balanced review of stocks on here.

portugull

Thank you timarr & david jhill for your comments.

I had completely missed yesterdays posts on Thinksmart (LON:TSL) because I used the Stockopedia Discussion bar and no discussions were listed since last year!

I had read Simon Thompson in the IC and he was the person who wrote about Thinksmart last year which prompted me to invest.

As you say it will be all about the negotiation as to value.

I hope the huge growth story will reveal that the December 2020 valuation is well out of date.

Paul Scott

Hi Effortless Cool,

Agreed, it's not a new idea at all to have company-specific discussion threads. I just thought that if I do a fanfare & some jazz hands, and shout hey everyone let's try this! that it might have some impact & steer everyone towards company-specific threads ;-)

By all means flag up your company-specific threads here on trading update/results days, to help draw attention to them, and please set up more! Same message to everyone. Especially if people add value by putting some useful links & pictures in the header.

This all strikes me as a good way of making better use of the facilities we've already got here, rather than asking the developers to change things, which means going into a queue.

Regards, Paul.

Bouden54

I was thinking along the lines of threads for stocks of particular interest, not for every single stock. There seem to be some firm favourites that get regularly discussed here, perhaps 20-30 stocks for starters?

Effortless Cool

I actually rate Simon Thompson as a tipster, but he does seem to have something of a blind spot in relation to frauds (he was caught out by Camkids as well as Globo) due to an over-reliance on accounting numbers, without applying any qualitative filter.

He was actually very late to tipping Globo, that being in February 2015, a couple of years after Paul Scott had called it as a fraud and almost a year after the the firm changed its auditor during the year-end process, which is when I finally saw the light. Globo were suspended on 23 October 2015 and never resumed trading. Here's what he said at the time:

However, the fact that City firms, financial institutions and myself included, have been duped is scant consolation for those readers facing losses on their holdings. It's time for the regulators and authorities to act, and I am determined that they will.

How's that going? Well Costis Papadimitrakopoulos seems to have been spending the last six years windsurfing in various exotic locations.

https://www.facebook.com/costi...

It seems that white-collar crime pays very well. Regulation is effectively non-existent, and Simon Thompson has not returned to the subject of Globo once since he vowed retribution.

sharw

"Paul was proposing 1 thread for each stock, just like ADFVN".

Well the other place does not have 1 each - it is as many as people want to create. There are dozens for Boohoo (LON:BOO) but they are listed with the date of last comment and number of replies so you will see which is the most popular and who created it:

..and rather than mess around with threads I would rather the limited resources at Stocko could come up with a way of putting a whole picture in a post. Here is the right hand side cut off from the above:

Understood, Paul, and you do jazz hands much better than me!

Chris1011

I wondered if the SCVR community can shed some light on a query I have in regards to the connection between Broker Research Notes and Stocko’s data sets.

I have just read a very comprehensive Research Note from TPI on Deepverge (LON:DVRG) (I hold) which, if the business plan is executed, could elevate DeepVerge to commercial greatness!

I then returned to Stockopedia and, knowing it ranks Deepverge (LON:DVRG) as ‘sucker stock’, wanted to understand the ranking gap in analysis between it and the Research Note. I now see that Stockopedia doesn’t contain any of the Broker estimated financial numbers at all, (in fact, it even suggests Deepverge (LON:DVRG) doesn’t have a Broker!) hence I guess it can only rank it as it does.

So here’s the question. Why is there this gap? Is it the Broker not ‘pushing’ the Research Note or, Stockopedia not ‘pulling’ the info from TPI?

I would imagine if Stockopedia updated these recent numbers, Deepverge (LON:DVRG) would be ranked very differently and may appear on more screenings for a ‘buy’ consideration?

I would be interested in people’s views.

Thanks

sevenccc

Property Franchise (LON:TPFG) changed financial PR last year too (to Alma). The change of NOMAD now may be the preference of the CEO, who is quite a strong character and has only been in charge for 18 months or so.

Numbers all seemed good in the recent update and Cenkos were in the chair for the financing of the Hunters acquisition so not sure there was any reason for a falling out.

Might be about getting access to some new IIs?

davidjhill

I don't take anything as gospel but generally I find ST pretty reliable. I don't know any commentator that has a 100% record btw so everyone can make a mistake. How many of you were buying Patisserie Valerie right up until it was a fraud?

What I would say is that Afterpay put out a public statement saying that the UK (or Clearpay) made up 10% of its monthly customer revenue and 5% of total customers (ie Clearpay customers are more valuable than customers in the core business). Price will be determined under pre agreed valuation metrics including sell side analyst values, so it seems it will be somewhat tricky for Afterpay to argue Clearpay should be worth much less than 10% of the deal price, or £2.1bn, which would in turn put Thinksmart (LON:TSL) share at £210m. That ties into the Thinksmart (LON:TSL) accounting valuations as remember they further discount the implied valuation by around half to come up with the numbers for accounts. That discount should in theory disappear since there is now a crystallisation event. These valuations were done by an independent 3rd party valuer.

I also note that Afterpay went from valuing Clearpay liabilities at $3m to $67m in their accounts pretty quickly (less than 1 year) and revenue has grown significantly since that accounting date too.

The key risk for me is that whilst I presume management are competent and have a strong wording around the valuation principles and have included clauses for independent arbitration if necessary I obviously haven't seen the contracts, so I can't be certain. Thus my assumed risk from the 80p mark is 15p or a value of around £50m for the Clearpay stake, but assuming it is valued as expected the upside is between 60-75p. Hence my inferred risk/reward profile.

In the grand scheme of this deal £200m isn't very much at all. They won't want a minority holder hanging on, particularly given the growth profile of Clearpay, so I suspect they will want to exercise the option at the earliest opportunity as this will be the cleanest way of completing the sale.

Nothing is risk free but that's my take on it.

Immotion (LON:IMMO) somewhat surprised there is no mention of this given it has taken up a fair bit of discussion previously on here. Pleased to see a new 16 seat theatre at Sealife Orlando for 3 years minimum plus 2 smaller installs for a total of 10 seats as well as an extension to the 22 seater at Clearwater.

Given the recent trading update it looks like there is plenty more to come here in terms of growth, targeting the zoo market next from Q1. At 6p is now a £25m market cap, but assuming no further lock downs looking increasingly interesting again to me.

RE: Thinksmart (LON:TSL)

I don't take anything as gospel but generally I find ST pretty reliable.

Globo wasn't a mistake on ST's part, it was a failure to even look at the numbers. Paul's analysis was spot on but it wasn't hard to pick it up once he'd pointed it out. Patisserie Holdings (LON:CAKE) is a completely different issue, virtually no one picked up anything uptoward - even in the aftermath it's been quite hard to detect the signs.

Paul's prescient analysis is here, even while ST maintained his buy tip:

https://www.stockopedia.com/co...

The Afterpay put option valuation is described by them thus:

The Clearpay Put Option is recorded at fair value and the valuation is re-assessed at each reporting period. The valuation is determined using the valuation principles outlined in the Clearpay Share Purchase Agreement which requires the valuation of Clearpay as a stand-alone entity. This calculation uses cash flow projections based on operating budgets and strategic business plans, after which a terminal value is applied, based on management’s view of the expected long-term growth profile of the business.

The determination of cash flows over the life of a business requires management judgement in assessing the future number of merchant acquisitions, customer usage, potential price changes as well as any changes to the costs of the product and of other operating costs incurred by the business.

The valuation is then derived by discounting the cashflow projections to present value using a discount rate that reflects current market conditions, external analyst views, industry benchmarks, and, where available, the underlying businesses cost of debt and/or equity.

Because the valuation is determined using cash flow inputs that are not based on observable market data, it is considered to be level 3 within the fair value hierarchy as per AASB 13 Fair Value Measurement.

https://afterpay-corporate.you... (page 45)

It's entirely possible that independent arbitration (yes, it's included, that information is in the public domain) may come up with a higher valuation but it sounds like they'll start with an argument about how to value Clearpay: DCF versus current value as a percentage of Afterpay's valuation. Whether Square can be bothered with that debate may be the opportunity here.

When I bought Thinksmart (LON:TSL) at under 40p the upside was compelling and the downside limited. At 90p+ it's far less so as it's impossible to know exactly how this will play out. On balance I still think it's worth hanging on, but it's a much more nuanced decision now than it was then.

timarr

Richard Goodwin

Go to the stock report page then the discussion tab/drop down for all comments mentioning the co :)

MichaelFBS

Hi Richard

Yes one can do that but having posts curated automatically by the “database” and placed on the home page next the folio news feed would make it easier to see new posts as they appear through the day.

Michael

bryans1311

Totally agree regarding Simon Thompson. I find he’s excellent at analysing numbers, but a tad naive when analysing people. Without trying to blow smoke... this is where I find these SCVRs excel. They’re a great judge of both the numbers and of the people presenting the numbers.

Boon

Thanks! Found the FT article, in case anyone else is interested: https://www.ft.com/content/dbf...

abtan

Joules (LON:JOUL) (no position)

I'm always torn on this one.

Some aspects of the business look fantastic, such as the £5.1m "Other" revenue, for example, which is the commission received from their Friends of Joules platform.

This is 100% gross profit, something that they should really emphasise, as I had to work it out/confirm it from the other gross profit %'s provided (see yellow highlighted sections below.)

Of course there's also the less good:

Declining gross margins for the last 3 years (including the last 2 years of retail).
Note that gross margin was 47.9% in the period just finished, down from 55.5% 3 years ago (see table above.)

In fairness to the company they have tried to explain this steep decline (large discounting, high shipping costs, etc..), though I don't recall seeing similar drops in other retailers so it does ring tiny alarm bells.
"E-commerce sales continued to grow in the US and Germany" even though international sales have declined 15% over each of the last 2 years?

I can't tell if this is a good or bad thing, but I guess given the lower international sales it's not too much of a worry if things back home are still going well.
Note that "Store Costs" were actually positive in H2 (+£1.3m) due to "business rates relief and the payments received from the Coronavirus Job Retention Scheme (JRS) when store colleagues were furloughed."

Also, why are Store Costs in H1 FY21 (£9.4m) and H2 FY20 (£11.9m) so much higher?
Furlough and Rates Relief were in place during these periods too, weren't they?

Looking at Note 5 of the accounts I also can't quite understand where all the benefit has come from.

I'm not really sure what to forecast on how profitability will be affected in future periods.

----

I feel that there might be something here, especially the Friends of Joules platform, but I'll remain on the side until the dust settles and the future looks clearer.

Good luck all holders.

"targeting the zoo market next from Q1"

In that case I'm pencilling in a fundraising soon to "capitalise on this amazing opportunity" and for breakeven to be pushed out even further.

Why buy Immotion (LON:IMMO) now when you could probably buy cheaper at a discounted fundraising soon?

Funnymoney

6th Aug '21

Hi Chris1011,

Deepverge (LON:DVRG) It might be good to ask this question too via the round green button at the bottom of the Stocko screen. I suspect that that broker is not covered by their data supplier.

It would be very useful for the rest of us if you could start a thread under the Deepverge Deepverge (LON:DVRG) page and outline the key points of the broker note and the forecast revs etc. I don't hold.

All the best

Small Cap Value Report (Tue 3 August 2021) - BLV, COG, NWF, JOUL, RST

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Paul Scott

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