Small Cap Value Report (Tue June 5 2018) - GHH, QUIZ, CAR, GBG, ALT, VNET

Tuesday, Jun 05 2018 by

Morning all.

Many results statements are out this morning, plus a few AGM updates.

The most interesting ones for me are:

3pm edit: Substituted Vianet into the list, in response to reader requests. Cheers!


Gooch & Housego (LON:GHH)

  • Share price: 1367.5p (+2%)
  • No. of shares: 24.5 million
  • Market cap: £335 million

Interim Results

This is a high-quality AIM stock which I haven't been paying enough attention to in the last couple of years. It tends to fly under the radar because it generally performs well, doesn't attract controversy and pushes out decent results year in and year out.

It's in the field of photonics - lasers for industrial purposes, fiber optics components, and other light-related technologies and applications.

Today's headline results are as follows: revenues up 6.6%, PBT up 11.6%. Expectations for the full year are in line with management expectations.

Some acquisitions contributed to the revenue growth; a quick back-of-the-envelope calculation by me says that the organic revenue growth was 1.4%.

The company's long-term progress is illustrated by its dividend stream. Aside from taking a break in 2009/2010, it has paid a beautifully rising stream of dividends all the way back to 1998.

One particular metric from today's report which really jumps out at me is that on a constant currency basis, the order book is up 36% compared to a year ago. Probably not all of that is organic growth but even so, it strikes me that the outlook must be a rosy one, with that sort of growth rate in orders.

Overall group strategy is based on R&D, Diversification and "Moving up the Value Chain":

G&H seeks to move up the value chain to more complex sub-assemblies and systems through leveraging its excellence in materials and components, and by providing photonic design and engineering solutions for our customers. This will enable G&H to transition from a components supplier to a solutions provider.   A significant proportion of our business in the Aerospace & Defence market now…

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All my own views. I am not regulated by the FSA. No advice.

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Gooch & Housego PLC is a photonics technology company, which manufactures optical components and systems. It provides photonics solutions for industrial, aerospace and defense, life sciences and scientific research applications. It operates through four market sectors: Aerospace & Defense, Life Sciences, Industrial and Scientific Research. Aerospace & Defense includes target designation and range finding; guidance and navigation; countermeasures; Space Photonics, and surveillance, displays and secure communications. Industrial comprises the industrial laser market for use in the semiconductor and microelectronic industries, and also includes other industrial applications, such as metrology and telecommunications. Scientific research covers academic and government-funded research, including multi-national projects. The Life sciences business includes optical coherence tomography, laser surgery, microscopy and development and manufacturing of medical and diagnostic devices. more »

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QUIZ plc is United Kingdom-based global women's wear brand company. The Company is focused on providing occasion wear and dressy casual wear primarily for 16 to 35 year olds and offers clothing, footwear and accessories. The Company’s occasion wear provides maxi and mini dresses, matching tops and bottoms, and footwear, bags and other accessories that are designed to complement a particular outfit. The Company’s dressy casual is designed to provide the latest on-trend clothes, shoes, bags and accessories that have a glamorous edge. In addition, the Company’s products includes denim, playsuits, shirts, tops and skirts. The Company also provides a range of outerwear such as faux fur jackets, parkas and biker jackets. Footwear offers dune River Island, missguided and ASOS. The Company’s brand operates in 19 countries through 65 international franchise stores, concessions and wholesale partners. more »

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Carclo plc is engaged in the supply of fine tolerance, injection molded plastic components, mainly for medical products. The Company is also engaged in the design and supply of specialized injection molded light-emitting diode (LED)-based lighting systems to the automotive industry. The Company operates through four segments: Technical Plastics, LED Technologies, Aerospace and CIT Technology. The Technical Plastics segment supplies fine tolerance, injection molded plastic components, which are used in medical, optical and electronics products. The LED Technologies segment develops solutions in LED lighting. The Aerospace segment supplies systems to the manufacturing and aerospace industries. The CIT Technology segment manages its digital printing of conductive metals onto plastic substrates. The Company is a supplier of control cables in Europe. more »

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

35 Comments on this Article show/hide all

Graham Neary 5th Jun '18 16 of 35

In reply to post #369869

Morning Sir... on a day with lots of news I will have to leave Driver (LON:DRV) and WYG (LON:WYG) to one side. They are quite a bit too labour intensive for my liking. But I know you are good at analysing this sector so would read anything you have to say about them! Thanks.

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Sanjiv Shah 5th Jun '18 17 of 35

Gooch looks an interesting steady eddie with a long track record ( founded in 1948!) but optically forward PE of 23 look 50% too high - perhaps ? but definitely one for the watchlist.

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Gromley 5th Jun '18 18 of 35

Hi Graham,

At the risk (certainty) of being a 'bit' curmudgeonly , I can't help but comment on the cutting edge / futuristic statement you highlight from Gooch & Housego (LON:GHH)

the Company's ability to wrap electronics and software around core photonic products to yield system-level solutions.

That is pure flim-flam imho.

I read :

One of our nerds has attached a raspberry pi (or it may have been an apricot tart - I'm afraid I'm not very technical) to one of our lasers and you'll never guess - you can turn it on and off without having to touch anything

I'm sure that there is much more to what they are doing than that, but it hardly sounds ground breaking to me.

I've no personal opinion on Gooch & Housego (LON:GHH) having not looked into it, but that's another of those examples where the language just turns me off in the first instance.

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simoan 5th Jun '18 19 of 35

In reply to post #370014

RE: Gooch & Housego (LON:GHH) Putting it all together, I'm tempted to have a small nibble at this one, the next time I'm deploying some capital. One for the bottom drawer, perhaps.

Although operating in a slightly different niche of the electronics markets, I have no idea why anyone would choose Gooch & Housego (LON:GHH) over XP Power (LON:XPP) which just looks better on nearly every single metric you care to choose. Why is Gooch & Housego (LON:GHH) so expensive - is it one of those AIM shares beloved of the CGT crowd?

All the best, Si

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Graham Neary 5th Jun '18 20 of 35

In reply to post #370059

It's rather flowery language, I agree.

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bobo 5th Jun '18 21 of 35

I mentioned my views on Carclo 6 months ago and the points made were poopooed by a number of other writers. I remain clear in my view it is a ? with some potential linked to a bunch of cash cows and does not offer any real synergies one part to the other. I'd avoid.

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ken mitchell 5th Jun '18 22 of 35

Am very pleased to see you are covering Altitude Graham. Until today hype but otherwise unimpressive. But since appointment of new Chief Executive there are now  signs of real progress and perhaps very fast growing revenues and profits. Cash tight so maybe a placing ahead, unless revenues are going to be enough short term to make a placing unnecessary. Can’t fathom what it is they do, but it sounds as though whatever it is it is now in demand! Share up 15p today.

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sharw 5th Jun '18 23 of 35

In reply to post #369984

Graham's thoughts on Driver (LON:DRV) at the time of the trading statement can be read here:

Today's results show a continuation of the turnaround, including moving to net cash (there was a very bad year to 9/16 in which new management kitchen-sinked).

I bought after the February statement with the plus points including -

StockRank > 90
Keith Ashworth-Lord's Buffettology fund (for which I have some respect) increasing holding.
Explanation of what the company does (referenced by drvodkaquickstep in reply 7 to Graham's report) which can be seen here:

Negatives -

Little forward visibility (but disputes will always be with us)


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DJCP 5th Jun '18 24 of 35


Whenever I see something along the lines of the quote from their RNS :
"The uplift in these costs primarily reflects the higher commission costs incurred associated with a higher proportion of sales being made through third-parties which have a higher cost to serve than sales generated through our own websites."

I immediately think of Amazon, so looked there and QUIZ have 143 separate items listed (excluding variations - Colour/Size etc.). Not many, but I haven't checked this against the items they have available on their own website.

I know from experience that Amazon have increased their fees over the past 1-2 years, have changed their Marketplace Seller T&Cs, and Sellers lose money and/or stock on refunds/returns. Amazon quite often refund a buyer (from the seller's funds) and allow the buyer keep the item as well - This has become so common, there are now blogs/threads informing buyers how to get away with this, and how to get items (not just clothing) for free. (Sorry, that started ok, but then turned into a rant ! lol)

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LeoInvestorUK 5th Jun '18 25 of 35

In reply to post #369879

Graham D,

Seeing Machines (LON:SEE), "only an AGM update...not surprising that there wasn't more information"

Indeed, AGM statements are often only 1-2 sentences saying things are inline and when the next update will be. Whereas IQE's statement very long yet told me very little I was interested in beyond being inline and not having a proper CFO. This only reinforces what I perceive as a gulf between their interest in buying lots of shiny cool machines and my interest in making lots of money.

I do take your point that continuing investment should imply continuing orders and that they need the right CFO. If only I trusted them to align investment with firm orders and to have similar ideas of what kind of CFO is "right".

(I have a quite small position that I trade in and out of).

Blog: LeoInvestorUK
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Graham Neary 5th Jun '18 26 of 35

In reply to post #369769

Hi rtj, thanks for all those suggestions - 2 down, 1 to go! Cheers. G

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runthejoules 5th Jun '18 27 of 35

In reply to post #370174

Thanks for your hard work Graham! Yes the per of GB (LON:GBG) looked a bit high when I sold out at 290p too - guess I should have stuck with it. Evil govt Surveillance will not be going away, but that balance sheet...

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Graham Neary 5th Jun '18 28 of 35

In reply to post #369974

Hi John. "Chief Envisioning Officer" is a rather silly job title in my book but I do like what I see at Vianet (LON:VNET). It's been covered now. I agree with you - it's good to have some jam today, so we aren't completely dependent on jam tomorrow. Thank you for the suggestion. G

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IGotPoesJacket 5th Jun '18 29 of 35

Altitude (LON:ALT)
Sold these today based on the complete lack of progress. I fear pump and dump on the usual suspects bulletin boards so decided to take profit when I saw it.
A marketing company that generates 41 (yep 41) likes for its Facebook page (And Everything) in 6 months doesn’t get my pulse racing.

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Graham Neary 5th Jun '18 30 of 35

In reply to post #370154

Thanks for the insights re QUIZ (LON:QUIZ) and AMZN. Yet another argument for closing our eyes to the $800 billion valuation and buying AMZN, I guess!!

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ken mitchell 5th Jun '18 31 of 35

Thanks Graham for the brilliant write ups across the board today. I don't know how you and Paul manage to find out so much and then write in such high quality detail day after day. It must take many hours and you both provide a brilliant service as well as clear pointers on shares to avoid or check out further.

As for Altitude your analysis of the figures today confirms what I already thought...that so far it has been a lot of hype but little or no sign of real progress. BUT the reason I've added some to my previous small punt today is that there are now signs that the hype just might be justified. The appointment of Nichole Stella as Chief Executive looks a possible game changer with a chance of explosive growth in the US especially.

We probably won't  know for sure until the next results.  IF the hype proves justified then the share could rocket, but until more evidence showing fast growing revenues and profits Altitude remains a high risk punt. I rarely invest in blue sky type shares as they nearly all end in tears, but wonder if fairly soon we'll find Altitude is a rare exception?

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johnsmith68 5th Jun '18 32 of 35

I agree. Many thanks for responding to requests for Vianet (LON:VNET) including mine and more broadly for the sheer breadth and depth of insightful analysis Paul and yourself relentlessly produce. One of the greatest services you provide is the reality checks that make it so much easier to avoid the myriad dross shares out there. I for one have been fishing in a smaller but richer pool of opportunities since I joined Stocko and in particular started following SCVR.

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bestace 5th Jun '18 33 of 35
I wonder how much revenue for Altitude is generated by $2.8 million of sales throughput on its platform? These are very early days.

We can get a reasonable indication from the financials provided previously by the company (see slide 13 here).

If I've done my maths right, $2.8m of sales throughput translates into c.$336k of revenue for Altitude. However the average order size of $1,278 actually experienced is more than twice the $500 assumed in their modelling, which if that continues means they could still have a very successful business even if take up is ultimately lower than the 5% market share they are targeting.

The biggest risk here is gaining traction with distributors and suppliers, so I thought the numbers disclosed today were quite promising given they were starting from scratch 6 months ago.

Based on the 462 distributors which they are actively engaging with, a simple pro rata implies those distributors could account for around $400m of revenues. If just 10% say of those revenues were channelled through Altitude's platform that would imply c.$48m of revenue for Altitude per annum, which compares to the current market cap of £40m.

Flex any combination of those assumptions even marginally upwards (no. of distributors, online penetration, gross margin, average order size, number of orders per annum...) and you rapidly get to potential revenue figures of multiples of the current market cap.

Yes it's still a story of deferred jam and it's high risk. But to me it seems misguided to write off Altitude as a jam tomorrow stock while focusing on the historic numbers reported today as the basis of valuation. The historic numbers are pretty meaningless at this point, other than to reassure that there are no cash burn issues like some jam tomorrow tech stocks out there.

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IGotPoesJacket 6th Jun '18 34 of 35

In reply to post #370294

Altitude (LON:ALT). 

Please explain your maths to show how you got to that revenue figure given the guidance.

Also, as far as I understand they targetted the biggest fish first, so whilst the “average” order may be 2 1/2 times fore cast here and now, this will fall going forward surely?
Happy with my 65p buy and 94p sale. I still fear pump and dump butwould be interested again around 70p looking to scalp some mugs.

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HHR 6th Jun '18 35 of 35

In reply to post #369789

I like Gooch & Housego (LON:GHH) and am considering buying.

One concern I have is the orderbook growth.

Since Mark Webster took over as CEO ghh always trumpets an impressive growth in orderbook but somehow, the corresponding growth in actual revenue that one would expect to follow on never materialises.

In the 2014 finals ghh said the orderbook was up 18%, in 2015 it was 11%, in 2016 it was 45%, and in 2017 it was 36.5%. Compare those sparkling figures to the actual revenue growth subsequently delivered - 12.5% in 2015, 9.3% in 2016, 18.7% in 2017, and 6.6% at the interim stage of 2018.

I accept there is probably a bit of currency effects and also the longer lead times associated with moving up the value chain but for me personally there is something not right about ghh's treatment of it's orderbook so I ignore it in my investment decision and assume 10% revenue growth in line with photonics industry trends.

I have noticed several other companies follow this pattern of massive increases in orderbook consistently failing to translate to auditable revenue. Stadium was a good example.

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 Are LON:GHH's fundamentals sound as an investment? Find out More »

About Graham Neary

Graham Neary

Full-time investor and independent analyst. Editor at Cube.Investments, small-cap writer at Stockopedia. Previously a fixed income analyst in the City and institutional fund manager. I'm a CFA charterholder and have the Investment Management Certificate and STA Diploma in Technical Analysis for good measure. When I'm not talking about finance, I enjoy recreational poker, chess and Mandarin Chinese. more »


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