Small Cap Value Report (Tue 9 April 2019) - Mello 2019, SOS, CBOX, LUCE, DEB, TPFG, BILN, PAM | Graham Neary

9th Apr '19 by Graham Neary

54 comments 14981 reads

Good morning!

Lots of updates to look at today.

This list is final:

Sosandar (LON:SOS)
Cake Box Holdings (LON:CBOX)
Luceco (LON:LUCE)
Debenhams (LON:DEB)
Property Franchise (LON:TPFG)
Billington Holdings (LON:BILN)
Premier Asset Management (LON:PAM)

Mello 2019

A quick reminder that Mello is coming up next month, with a Trusts & Funds event on Wednesday 15th, followed by the main event.

There is a 40% discount for the main event with the discount code STOCKO40, and then the Trusts and Funds event can be added to your trip for the princely sum of £10.

The conference will incorporate the Mello Awards, so you can get your nominations in now if you'd like to influence the awards ceremony!

It will be a great chance to meet a wide range of company CEOs and fellow investors, and I look forward to seeing many of you there.

(Update by Paul Scott, who owns shares in SOS.)

Sosandar (LON:SOS)

Share price: 28p (+6%)
No. of shares: 116 million
Market cap: £32.5 million

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MrContrarian

9th Apr '19

My morning smallcap tweet: Fat knight fails to rescue Debbie from clutches of lenders.

Sosandar (LON:SOS), Appscatter (LON:APPS), Colefax (LON:CFX), Connect (LON:CNCT), Pelatro (LON:PTRO), Debenhams (LON:DEB), £7DIG, Stride Gaming (LON:STR), Collagen Solutions (LON:COS)

Sosandar (SOS) guides FY rev up 228% to £4.44m, comfortably in line with market expectations. Gross margin 55%, up 558 bps. Loss expected to be in line with market expectations. I hold.
appScatter Group (APPS) RTO of US co Airpush and placing at 26.8p, a 55% premium! Placees get 1:1 warrants.
Colefax Group (CFX) tender offer for 8% of shares at at least 550p. SP is 475p.
Connect Group (CNCT) renews magazine distribution contract at £130m PA.
Pelatro (PTRO) secondary placing of 8% of co at 80p, a 17% discount.
Debenhams (DEB) Wipeout? Deadline passed for Mashley fat knight rescue to be approved. His post deadline £200m offer also rejected. Access to second half of new debt "will now only be available to the group's subsidiaries upon transfer of those subsidiaries into the ownership of a lender-approved entity." Would wipe out shareholders. I'm short.
7digital Group (7DIG) New CEO, CFO start. Decide material further equity and/or debt funding needed in the next quarter to meet going concern hurdle, significant dilution for holders.
Stride Gaming (STR) warns H1 net gaming rev 5% lower than expected. Also £400k extra technology and marketing investment in 51% held Passion Gaming.
Collagen Solutions (COS) guides FY rev up 18%, head of market expectations. Loss lower than expected. New FY trading in line.

TamzinPiworld

Property Franchise (LON:TPFG) FY18 results

Good set of results in spite of market backdrop. Rev up 11%, and profit up 19.4% if you strip out one off exceptional gain, FY17. Robust balance sheet. CEO is very bullish about the market and where TPFG sits. Stephen English flagged in his recent interview, highlighting the appealing franchise model.

Here's an overview by Ian Wilson CEO: https://www.piworld.co.uk/2019/04/09/the-property-franchise-group-tpfg-fy18-results-overview-by-ian-wilson-ceo/

grumpy5

Good numbers from Sosander (LON:SOS), but yesterday afternoon's hike in buying interest looks very sniffy!

Paul Scott

Morning!

My initial reaction to Sosandar (LON:SOS) update. This is my largest long position;

Excellent update - sales ahead of last Shore Capital forecast of £4.35m. Not sure why the company uses odd phrase "comfortably in line", instead of ahead?!

Gross margin improved to 57.7% in Q4, which I've calculated on a spreadsheet using the H1 numbers, and the Q3 trading update, plus of course today's update. This is a very high gross margin, for a company ordering small production runs. It indicates strong pricing power, and that most styles are being sold mostly at full price (little discounting). An absolutely key metric - very few competitors of this size will be getting anywhere near that level.

Cash burn (once you strip out increased inventories) is about £0.75m, down from £1m per quarter previously. That's all as planned, so I find it most odd that some posters here mention cash burn as if it's a surprise. It's not, it's as planned. They're driving growth, and that costs money. I reckon breakeven revenues are about £12m p.a.. Likely to get fairly close this year, with house broker forecasting £9.5m revs this year (ending 31/3/2020). After that, it moves into substantial profitability, and of course then the market cap would be multiples of the current level, as the market prices in continuing growth.

Another key metric is repeat orders - which are running at 54% of all orders. This proves that customers love the product, because they come back to buy more. Also, marketing spend drives additional customers, which together with repeat orders, is what's fuelling this exceptional growth.

After some terrible updates from, e.g. Quiz, and Bon Marche, I think some people mistakenly might have thought this would read-across to Sosandar. It hasn't, they're trading as well/better than expected. So I'm very pleased with this update.

Regards, Paul.

PJ0077

The Sosandar (LON:SOS) customer database rose from 100,000 in 3Q to just 105,000 - has the company really reached maturity already?

Just as worrying is the drop in the conversion rate to 2.92% and a fall in average order size.

There are a few dark clouds hovering over this 'blue-sky' stock.

Lion Tamer

Sosandar (LON:SOS)

HI PJ0077
Should we expect the growth to be straight line throughout the year?
From today's RNS (quoted out of context, of course!) ".... the peak seasonal months of April-June"
Therefore my assumption is the coming quarter is the one that will potentially shift the dial and matters most. I could be wrong again of course.

GrahamF

Sosandar (LON:SOS) is a tiny start up that should be growing exponentially if they really do have something different to offer. I don’t think comparison with mature businesses such as Bonmarche tells us much.

The cash burn issue is possibly not so much an expectation of profitability prematurely but more an issue of whether a further fund raise will be needed this year and the consequent dilution of existing shareholders. Increasing inventory is a bit strange unless you believe that you will not be able to fulfill orders otherwise or there will be significant purchase cost savings from bigger orders. What happens if it is a wet summer and those summer dresses are not so popular?

Better margins do not necessarily indicate pricing power to me at this stage in the company’s progress. When new products are introduced it is the early adopters that are buying, not the early majority, and early adopters tend not to be price sensitive in their nature - they are looking for features other than price. So, we need to wait longer in my view to see if pricing can be maintained as the company runs out of early adopters as it grows and needs to start penetrating more price sensitive areas of the market.

Overall good progress, but still very high risk despite the progress in my view.

rmillaree

Sosandar (LON:SOS)
pj0077

Nice try at a hatchet job :)

The Sosandar (LON:SOS) customer database rose from 100,000 in 3Q to just 105,000 - has the company really reached maturity already?

Might be nitpicking but it was less than 100k to over 105k - over 5% increase in 3 months in the quiet 3 month period isn't anything like maturity - thats over 20% - yoy growth - ok not enough if projected forward to hit targets but in summary the maturity comment is just a joke when forecasts are for sales to go from 4.2 mil to 9.5 mill and the company has not indicated they are unhappy with these forecasts - thats over 100% growth. One stat taken out of context can be whateover you want it to be if you believe the earth is flat :)

Just as worrying is the drop in the conversion rate to 2.92%

Conversion rate increased 76 bps to 2.92 on a proper LFL comparison so the conversion rate is not down on the official metric - you do have a good point though that the conversion rate YTD has dropped from the previous update - this could be entirely seasonal though if they generally struggle to convert as much in the quiet period of the year.

and a fall in average order size.

Again on the official YTD comparisons they are actually up 10% not down - ok there is a drop come the year end -from previous update but again this could be entirely seasonal. It would make sense the bumper size orders are just before XMAS or summer and not in February and March

Average order value increased 10% to £103.19.

with retail comparing non LFL metrics can sometimes if not always be meaningless.

It is a shame the company didn't give some LFL comparisons for Q1 - not sure someonelse can work these out perhaps? - again though the quiet period of the year may not give much away - all that really matters is whether they are on track for current forecasts.

ambrosia

according to the BBC Mike Ashley spent £150 million acquiring 30% of Debenhams, the current market cap is £22.5 million meaning if the shares hadnt been suspended that 30% is worth about £7million
dam :-(

almost feel sorry for him

Graham, can I put a request in for billington results look good today

thanks

carmensfella

Only a 5% increase in the customer database but do not forget they don't spend much on marketing in the quiet Jan-Mar period, as a seasonal low. Marketing spend cranks up again about now, so customer growth will increase again. It looks like they did £1.0m in revenues in Jan-Mar, which is better than I expected in the quietest quarter

In summary..... Quiet season, and low marketing spend. Yet did £1.0m revs compared with peak season (and heavy marketing spend) of £1.6m. Implies very good repeat customer spending - a key metric

Keywords Studios (LON:KWS) FY18 analyst presentation given yesterday by Andrew Day, CEO & David Broderick, CFO.

https://www.piworld.co.uk/2019/04/09/keywords-studios-kws-fy18-results-presentation/

A superb presentation. Really worth a watch. KWS keep on doing it very well. The market is growing at 9% a year, outsourcing is still less than 50%, so lots of market to grow, across many services lines. Clients are up selling to multiple service lines. They now supply 5 service lines to Fortnite! (Benefitting from being game agnostic.) Still a sector with loads of tiny players, so ripe for consolidate. Andrew goes into depth about each of the service lines. There are case studies of integration of VMC, Art service line and audio service line. And, you get all the analysts Q&A. It's long but worth it, even if you just skim through it.

Hi PJ,

You're not taking into account the seasonality, and big reduction in marketing spend (as planned) from Q3 to Q4. So I wouldn't expect much increase in customer database, in the quietest quarter of the year, when they don't spend much on marketing.

The customer database growth should accelerate in Q1 (Apr-Jun) as that's a much busier trading period, and marketing spend is correspondingly increased - this was explained in the interview I did with management here. They target growth with marketing spend, at seasonally busy times of year - to get the fastest & biggest payback on marketing spend.

Conversion rate - good point, I'll ask management why it has dropped from 3.47 in Q3, to 2.92 for the full year. Although note that it was 2.75 in H1. So the 2.92 full year figure is actually an increase over the H1 figure. Looks like Q3 was an outlier - probably because it's the seasonally busiest time for year, so customers are looking to buy for Xmas parties, etc. Whereas in Q4 (Jan-Mar) maybe more people are just browsing? I'll ask for some colour on this anyway when I speak to management shortly.

I think the dark clouds are in your mind, not reality! ;-)

It's not a blue sky stock. It's delivering fantastic revenue growth, at high gross margins. That is not blue sky. I would define as blue sky being a company with nil, or negligible revenues, and a fancy idea. Whereas SOS is set to be profitable next financial year.

Bottom line, is that revenues are consistently beating forecasts, and that the extra gross profit generated is being spent on increased marketing spend. That's the planned strategy. Remember when this listed, it was forecasting £3.0m for the current year, which I thought looked very ambitious. It's actually delivered £4.44m - that's 48% ahead of the original plan. You won't find many early stage growth companies that out-perform on planned growth.

I'm not saying it's a blue chip. There are obviously execution risks, but given the excellent track record so far, I'd say the concept is proven. Given the quality & experience of management, risk:reward looks highly favourable to me.

Regards, Paul.

drainbolt

Could I ask that you review the date of this article - I think today is 9th April! Views on TMMG and AMER would be welcome.

Albertos

Billington Holdings (LON:BILN)

As far as I can see they beat profit forecasts today and gave an upbeat outlook into FY2019. Particularly liked:-

"The level of secured work Billington takes forward into 2019 is unprecedented and ensures that we can look to the future with optimism. Undoubtedly 2019 will present its challenges, however, we are confident it will be another successful and progressive year for the Group."

This ties in with the major contract wins announced in November 2018 and:-

"Billington continues to monitor both the challenges and opportunities which may result from the UK's exit from the European Union. To date we have seen no discernible impact on trading or enquiry levels."

Phil

Hold a small stake

Small Cap Value Report (Tue 9 April 2019) - Mello 2019, SOS, CBOX, LUCE, DEB, TPFG, BILN, PAM

Mello 2019

Sosandar (LON:SOS)

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Graham Neary

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