Small Cap Value Report (Tue 30 Apr 2019) - TUNE,

Monday, May 06 2019 by

Good morning, it's Paul here.

I've still got the flu unfortunately (it's been a full week now), hence wasn't able to finish yesterday's report - profuse apologies. I seem to have made some progress overnight, so am hopeful of being able to put in a better performance today. Catching up will have to wait until I'm firing on all cylinders again.

7-8am initial skim

Focusrite (LON:TUNE)

Interim results look good - driven mainly by improved margins.

On the list to look at in more detail later. Nice company, but too expensive, will probably be my conclusion.

Countrywide (LON:CWD)

Q1 loss as expected. Broadly in line outlook for 2019 full year.

Possible future turnaround?

Solid State (LON:SOLI)

Good trading update - finished year ended 31 Mar 2019 "slightly ahead" of upgraded forecasts.

Looks reasonably priced on 13.5 times fwd earnings, despite big recent rise in share price. Could be worth a closer look maybe?

Dillistone (LON:DSG)

Balance sheet is too weak for me.

£260k loss for the year.

New product "Gated Talent" looks to have flopped, or at least doesn't justify anything much in the valuation.

Cost-savings - staff are being offered the opportunity to relocate from London to Basingstoke or Eastleigh. Lucky them!

Too small, and not a growth company, so why is it stock market listed?

Xeros Technology (LON:XSG)

Terrible figures, and rapidly running out of cash. Needs to raise more cash in 2019, it states.

Why do people punt on things like this?

Focusrite (LON:TUNE)

Share price: 495p (down 4.3% today, at market close)
No. shares: 58.1m
Market cap: £287.6m

Half year results

Focusrite Plc, the global music and audio products company supplying hardware and software products used by professional and amateur musicians, today announces its Half Year Results for the six months ended 28 February 2019.

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Focusrite Plc is a music and audio products company supplying hardware and software products used by professional and amateur musicians. The Company is engaged in the development, manufacture and marketing of professional audio and electronic music products. It operates through three segments: Focusrite, Novation and Distribution. The Focusrite segment includes the sales of Focusrite branded products. The Novation segment includes the sales of Novation branded products. The Distribution segment includes distribution of third-party brands, including KRK speakers, Ableton, Stanton, Cakewalk and sE Electronics. The Company sells its products in approximately 160 territories and countries around the world. The Company offers Scarlett, which is an audio interface; Blocs Wave application, which is used by musicians to create their own sounds and songs on any iPhone Operating System (iOS) smartphone or tablet, and e-commerce Websites. more »

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27 Comments on this Article show/hide all

Snoo 30th Apr 8 of 27

Park (LON:PARK) would be interesting if you could cover it, Paul.

Have been watching this a while and might consider this a good entry point. Don't think it will be growing much, but they appear conservatively managed, cash flow appears good and dividends are progressive which at the lower price is a good yield.

The reasons for the warning appear quite neutral and simply accounting presentation, as revenue can only be recognised when a customer redeems a card (instead of at point of sale of the card). But this would mean there would be proportion of revenue will never be recognised while Park already have the cash. (they have a provision of £48m for unspent balances on cards).

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Aislabie 30th Apr 9 of 27

Crimson Tide (LON:TIDE) is the smallest market cap stock that I hold (battling with Falanx (LON:FLX) for that title) and its results today provide an interesting contrast with some other tiddlers.
As a software company looking at many different market opportunities it could have taken the Cloudcall (LON:CALL) route and splashed out (other peoples placing) money on expansion plans generating continuous multi year losses.
It has however chosen to expand exactly as far as its cash generation allows, at least for now. It has generated small net profits and held around six months operating in net cash.
So is this wasting the opportunity that a public company offers to increase the investment rate through public offerings, or ,in the easily upset plans of very small companies will their prudence be rewarded?
The growth of their business is masked by the SAAS accounting for their revenue (and a recurring revenue %age would be a desirable part of any RNS), so it is not clear what the apparently good contract news is actually doing to the top line.
For now I am expecting that the revenue line will be showing growth and on the back of prudent management they could get away an accelerative placing without significant discount.
Slow and steady does not always win the race and I am almost certainly invested unnecessarily early in this stock butter now it earns its place in the riskier part of my portfolio

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peterg 30th Apr 10 of 27

In reply to post #472781

Selftrade took 5 working days to process the last Somero Enterprises Inc (LON:SOM) div - not that different from several other brokers, so I'd expect the same this time. I don't think chasing them will speed things up. However, if SOM start paying in £ as suggested that should resolve the problem.

However, they did correctly deduct only 15% in an ISA, not 30% tax as some others do.

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AdrianWilliams2611 30th Apr 11 of 27


I’m really looking forward to your thoughts on Loungers (LON:LGRS) vs Revolution Bars (LON:RBG). Massive difference in the Enterprise value per site.
Looks like Loungers is the shiny new toy. Their Admission document seems very light on facts and numbers.
I hold Revolution Bars (LON:RBG).

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Camtab 30th Apr 12 of 27

In reply to post #472771

Interesting Purpleski. How do you handle your trading? I find Hargreaves trading dpt pretty poor but like the security I feel with them (i guess as I have always used them). Fees at Hargreaves seem to be capped at £200 so I guess for a full account you are saving £80 a year. Trades turn out around £11.95 per trade and Interactive give one free a month, so save there. I do like clarity of the way they explain fees. Erm tempted but then Hargreaves charge £25 a stock to transfer out, whereas Interactive charge nothing (annoying)! So will take few years to take full benefit of lower and fees and Interactive could change by then. I guess it is down to how good trading is?

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Wimbledonsprinter 30th Apr 13 of 27

In reply to post #472811

Aislabie. I also hold Crimson Tide (LON:TIDE) and I was slightly underwhelmed by the results as they did not seem to reiterate, in the same effusive terms as previous releases, the growth potential for 2019 and 2020. Therefore, I was pleased to see that Arden was keeping its 2019 and 2020 forecasts for both revenue (doubling to £4.9mby 20E) and EPS (rising to 0.2p by20 E). However, Arden does reduce its FCF forecasts for 2019 (quite sharply) and for 2020 - seemingly mostly due to higher working capital. I think H1 2019 numbers will be critical to see if growth is coming through. Elektron Technology (LON:EKT) (I do no hold) with its somewhat similar product shows that high growth is possible.

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rwalford 30th Apr 14 of 27

In reply to post #472751

Dear John,
Somero Enterprises Inc (LON:SOM)
Many thanks for the heads-up on this.
I hold, and have checked the position with Halifax Share Dealing: they confirmed to me that as I have a W8-BEN in place, the deduction in relation to the October 2018 dividend was only 15% and the April dividend will be the same.
There was inevitably a delay in converting to GBP, but the sterling sum has arrived and will be processed today, they say.
So if in the future, dividends can be paid in sterling, it sounds as though all parties have got their act together!

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HornBlower 30th Apr 15 of 27

Countrywide (LON:CWD) might well be a recovery story. Operations seem to have stabilised and performing in line with a soft market. Generating decent cash even at current activity levels, party due to all the businesses they bought in the last few years. You would think not that hard to fix poor strategy put in a couple of years ago of centralising the decisions rather than letting local management run their business. Trades at 5x EV/EBITDA and 0.3x EV/sales v LSL at 7.5x and 0.9x. Same EV as Foxtons which 1/5th of the size of CWD, is making operating losses and trades at 1.5x EV/sales.

Disclosure long CWD short FOXT.

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Pennyledges 30th Apr 16 of 27

Hey Paul, Hope you are feeling a bit better...please don’t apologise for being happens to everyone at sometime or another. Anyway I like your short sharp concise notes first thing....great for giving early follow up ideas for me to look at....Thanks for your efforts much appreciated.

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tomps3 30th Apr 17 of 27

Slightly belatedly, we've just posted a results video for Venture Life (LON:VLG) who reported 18.4.19.

FY2018 results, +17% rev growth and EBITDA ahead of expectations. Growth achieved from both organic and M&A. Cash at year end £5.8m.

There's also a Venture Life (LON:VLG) overview of the investment case: the business model, market environment and growth strategy

Completely separately we've just published a video of the investment case for Deepmatter (LON:DMTR) who are a disrupter in the chemistry research space, saving companies $bns through the use of tech in chemistry labs.

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rkells 30th Apr 18 of 27

In reply to post #472901

Paul, when you are feeing up to it can you have a look at the Animalcare results out today.

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Zipmanpeter 30th Apr 19 of 27

In reply to post #472826

Agree re Loungers (LON:LGRS) IPO– 2 (non-financial) reasons to avoid that IMHO the admission document confirms:

1. Financing History – Loungers has been through 2 recent Private Equity (PE) deals (first Piper came in during 2012 who then sold to Lion in 2016). Almost no need to read further !

Surprise, Surprise on balance sheet in April 2018 had Total Assets of £183Mn, £113Mn is goodwill and £59Mn is PPE - which in café/bars is what? Unrecoverable fixtures& fittings. No doubt Paul will dissect more eloquently and forensically and the IPO has raised some equity but the warning signs are there - especially as the sellers, both founders and PE, took out some cash at the IPO.

2. Strategy - IPO openly celebrates that they compete against everyone – cafes, coffee shops, bars and casual diners and that they target everyone from young to old. This is the epitome of the ‘Squishy middle’. At best they offer ‘community’ but lacking a clear identity what will this be?

Their model may make sense for entrepreneurial types and a private business. Find some good cheap secondary sites, improve % GM through some central purchasing and make some money. It can work whilst the founders magic can be applied – say up to 50 sites. But what is the glue that holds it together when, as they aspire in the IPO document, they go to hundreds of sites?

(They even celebrate this lack of clear strategic positioning on their website in their foundation story: the original 3 founders in the F&B business wanted to open a place of their own to drink in, found a site that happened to have a kitchen already in place and “after a few months of sort-of-not-knowing-what-they-were-doing, Lounge opened”. )

For a sustainable, valuable long term national branded chain, you need a clear market positioning.

Expect Loungers to serving a turkey soon

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RDHOWARTH 30th Apr 20 of 27

Any thoughts on GFM welcome, is this investment grade or simply too risky? Numbers today are not good and its pretty low quality to put out a resource upgrade in the knowledge that trading was poor. The shares have reacted accordingly perhaps to issues with the zone II license rather than trading. Director buying in low 90s towards the end of last year perhaps augurs well for getting commitment on Zone II.

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hawkipa 30th Apr 21 of 27

In reply to post #472711

Thanks for sharing this David. I too emailed Jennifer at Somero Enterprises Inc (LON:SOM) earlier today and received a similar reply. She had told me previously nobody else had had problems with their brokers paying in a timely fashion, which from the chatter I saw, I very much doubted. AJ Bell (LON:AJB) seemed to be particularly bad last time as was two months before payment was received I think. They are guiding for a week from now this time. Hopefully, this will not be an issue going forwards.

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WDWombat 30th Apr 22 of 27

Solid State SOLI looks like an extremely good company in specialist technology. I noticed it at the end of last year, probably here in Stocko; it seemed to have pretty consistent profitabilty and decent returns despite a low operating margin and a setback when it lost a contract to provide 'bail monitors' to the prison service - never got to the bottom of that but you can see the blip in earnings a couple of years ago. They are not great self-publicists but they made an extra trading update in January as business was going so well. That started the price moving north. There was an acquisition last year which helps H2 headline sales figures but at £4mn the cost is well within the company's financial scope though there will be a smallish loan from Lloyds, I would guess £2-3mn, to make up the consideration. If you read the latest updates there is an underlying feeling that things are really coming together here.

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JohnEustace 30th Apr 23 of 27

In reply to post #472921

Not that I'm about to buy in to Loungers (LON:LGRS), (PE backed IPO's being a no-no), but I think it's worth going in to a Loungers before dismissing the format out of hand. My local ones trade through the day and into the evening which is a bit of a holy grail for the restaurant business.
I suspect the founders are a bit more switched on than the website story makes out - they wouldn't have got this far otherwise.
But for now I'll stick to being an occasional customer.

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Welshborderer 30th Apr 24 of 27

In reply to post #472946

I am pleased to have posted this morning as the comments have all been thought provoking. It all serves to prove the odds seem stacked slightly against Private Investors, or am I just getting paranoid?

Further to your comment Hawkipa, Halifax informed me the industry standards permitted them up to 10 days to carry out their procedures and implied their processes were therefore speedy!

I hold Somero Enterprises Inc (LON:SOM) in both ISA and Share Dealing accounts intending to gradually move the entire holding within the ISA umbrella in case the original advantages return in due course. I have looked and indeed received something: dividends for both holdings arriving in the SD account and then those for the ISA being transferred out leaving at this stage a negative cash situation. As the moneys received are significantly lower than a simple equation would imply clearly something has been deducted for tax so will later work out whether they have taken note of my W8-BEN.

Happy days. David

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timarr 30th Apr 25 of 27

I am pleased to have posted this morning as the comments have all been thought provoking. It all serves to prove the odds seem stacked slightly against Private Investors, or am I just getting paranoid?

We had a long old rattle around this issue at the end of last year:

What we collectively figured out at the end of it is that the root of all the problems is that Somero have been stuck in the late 19th century doling out US dollar checks (sic) to its UK shareholders.  The payments arrive, eventually, having been presumably transported by steamship via the Panama canal and are then converted back into sterling by periwigged tellers wielding quills and parchment before being finally passed on to shareholders.

Beyond that, however, some brokers shell out the dividends before they've actually received the payments, once they're sure that the cheques have arrived. So some shareholders don't see the issue. Some brokers - notably AJ Bell - don't. The process also reveals that some brokers are generally better and more efficient than others - no surprise there.

As a shareholder it's welcome news that Somero has finally entered the late twentieth century when it comes to payment technology, but I don't think we need to start imagining conspiracies among brokers: the few million or so that Somero pays out to UK shareholders each year just isn't worth the trouble.


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Gromley 30th Apr 26 of 27

In reply to post #472966

Not that I'm about to buy in to Loungers (LON:LGRS), (PE backed IPO's being a no-no), but I think it's worth going in to a Loungers before dismissing the format out of hand. My local ones trade through the day and into the evening which is a bit of a holy grail for the restaurant business.

Totally agree with your first sentence, but on the second I don't believe it is a holy grail at all. Maybe for pure 'restaurants' this is true, but for casual diners or bar/diners everyone does this. Thinking around my town centre - Waggamma, Pizza Express,  Eat, Bills, Cafe Rouge, Ask  plus a good few smaller brands and independents.

The best though at sweating the opening hours though I would say (still in my town) are Wetherspoons & Greene King who manage active trading from breakfast through to chucking out time.

That some of the other venues don't exploit the earlier in the day / or later in the evening market is not I think because they can't but rather because they choose not to. So whilst I accept that without witnessing a Loungers I am forming an opinion on limited evidence I cannot really see anything to suggest they have found a previously undiscovered 'magic formula',

I can therefore think of more reasons to 'go short' than long, but for the time being I will do neither.

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Snoo 1st May 27 of 27

In reply to post #473011

I agree.

Problem is with visiting one is that it doesn't necessarily give you a great idea of the finances.
I mean, I visited Patisserie Valerie quite a few times and was satisfied with the products they sold, as well as the number of people that visited their shops. We have to assume that in the end, they were loss-making.

I suppose in hindsight that although the tables might have seemed full, their throughput was much less than Greggs (whose customers mainly did not eat in) and they would also have much higher rent and staffing costs.

So whilst there is nothing wrong with Loungers as an experience it doesn't necessarily translate into profits. I can imagine that breakfast might be a tough sell, even if they have a high street location. Of course that would not bother customers, where less people (but not none) in the restaurant actually translates into better service and better ambience.

Also there may be a bit of a competitive response. I think it would be very unlikely for a chain to get competitive advantage on food alone, the exceptions being things at the bottom of the pile (ie KFC vs generic chicken shop, Starbucks vs generic coffee shop) and the very top (Michelin starred vs non-starred). So we're looking at something more intangible.

It could be the case that Wetherspoons could never adapt their pubs to replicate it, but I can't see what is stopping on a local basis another similar eaterie being setup. The barriers to entry are very low, and each particular location will have different parameters for competition. While I think there are some locations that definitely favour a Loungers-type place I do not think there will be hundreds.

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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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