Small Cap Value Report (Wed 10 July 2019) - SDRY, EQLS, AFX, TEG

10th Jul '19 by Graham Neary

42 comments 9963 reads

Morning!

There is still an overhang from yesterday, but for now I'm studying today's results. I got as far as TEG by close of play:

Superdry (LON:SDRY) (-4%) - final results
Equals (LON:EQLS) (+2%) - trading statement
Alpha FX (LON:AFX) (+8%) - trading statement
Ten Entertainment (LON:TEG) (+2%) - trading update
600 (LON:SIXH) (+2%) - final results
Charles Stanley (LON:CAY) (+1%) - trading update

Superdry (LON:SDRY)

Share price: 436p (-3%)
No. of shares: 82 million
Market cap: £358 million

Final Results

This is within our small-cap limits - not something that I would have expected, if you asked me a couple of years ago! These shares were changing hands at £20 at the start of last year.

Co-founder Julian Dunkerton is back and his first priority is to "steady the ship", in his own words:

All the team in Superdry are working incredibly hard to deliver the direction set out, with a real focus on returning the business to its design-led roots and getting the retail basics right.

Results

revenue flat (£872 million), gross margin down 250bps to 55.6%
underlying PBT £42 million (from £97 million)
net cash £36 million

Outlook

There is no crumb of praise for previous management, who get the blame for the problems which now need to be fixed:

Given the scale of the trading downturn in FY19 and the lead times required to rectify the product range and proposition, management view FY20 as a year of reset, creating a platform from which Superdry can return to long-term profitable growth. We expect our financial performance in FY20 to reflect market conditions and the historic issues inherited.

Revenue is set to show a "slight decline" in FY 2020, "particularly in the first half".

Dunkerton's statement

This is important - it outlines his vision for reinvigorating the brand and the company. Nothing else really matters.

Key objectives:

focus on design, rather than the "buyer-led approach" of the previous CEO. Using a combination of in-house designers (which Dunkerton will work with) and the SuperDesign Lab (a consultancy led by SDRY's other co-founder).
return to previous quality of product
reduce lead times, drive cost efficiency
create "more…

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10th Jul '19

Graham
Sorry to be so late but having just taken an opening position in Ten Entertainment (LON:TEG), is there any chance after your marathon effort on Superdry (LON:SDRY) thay you could cast your eye re over this. It was either Hollywood Bowl (LON:BOWL) or Ten Entertainment (LON:TEG) but I opted for the growth and yield of £teg

Graham Neary

Hi Steves, I'll be back later and will give it a shot. G

Vsihv

Ten Entertainment (LON:TEG) - I hold - happy with results - will consider adding based on Woodford fall out - generally I am of the view that if going down the consumer cyclicals route, speciality might be a better prospect than general retail. Ten Entertainment (LON:TEG) given performance and valuation supports that - I certainly sleep easier with this holding.

J D Wetherspoon (LON:JDW) - Seriously - how can that even be legal - the arrogance of a man who feels he can report to shareholders "As far as the business is concerned", as an afterthought in outlook is beyond me.
Note a remoan post - if anything I am a bremoaner and am beyond caring. Hopefully UK PLC can follow Italian companies have delivered returns despite their government.
I have little faith in our government, regardless of which end of the political spectrum they may come from.

Alpha FX (LON:AFX) - no position, have considered multiple times but repeatedly ruled out due to valuation, which if history is anything to go by, was the wrong decision (Alpha FX (LON:AFX) is not alone). My concern still remains the growth runway, which I feel that valuation relies on.
Big as the FX hedging market is, there is a high level of concentration in the volume of transactions - the largest companies (and banks (central and regular)) dominate FX transactions - Alpha FX (LON:AFX) cannot offer a complete financial risk hedging solution (interest rate swaps / Xccy swaps / commodity price hedges) to this part of the market, which is by far the biggest proportion and one of the reasons the major banks retain such a large installed base.
I have been proven wrong and will likely continue to be - good luck to holders.

V

doublelutz

I agree with every word Tim Martin says. Hope it is legal for me to say so! Incidentally the RNS starts with the business information if you have read it.

I am glad you do - shame he doesn't have any political power to actually implement multi-deal Brexit, so maybe you want to write to your MP.

I read the announcement - if you read my post, you would find I was referring to the commentary on the outlook statement.
Fortunately, I am not a shareholder so he can fill his reports with whatever blog he chooses and include any dated articles he sees fit.

I do think investors might benefit from the contents of the outlook statement being defined, much like the director's report (under Company Law) has certain requirements that must be stated.
If Chairpersons continue to pontificate about political matters that they cannot control in their regulatory announcements, the authorities will start imposing what must be included in the outlook statement, and that inclusion I expect will not be an afterthought.

Thanjs. Look forward to it
Steve

ken mitchell

Many thanks for that superb update on Superdry today Graham.

A couple of additional concerns:-

As hinted at in their update comment today (“it will be VITAL that the successor candidate can work closely with Julian....”) it seems Julian D is not the easiest to work with, and Sunday Times article mentioned that too. So strong characters might well be needed if he gets too headstrong.

Also Julian has always had a penchant for flagship stores in very expensive locations. Yet those stores are often empty. I’ve been to empty stores in York, Edinburgh and Kitzubel in Austria. And in the update today it was made clear that store closures were not really on the agenda.

“We hope to improve store profitability across our own store portfolio without needing to close a significant number of stores.”

With Ecommerce stalling and focus on improving that vital, might it have been better to consider closing some loss making stores?

davidjhill

Bango (LON:BGO) is super interesting in my view. It has been hit hard in part because its own house broker Cenkos took a big red pen to forecasts last year on margin assumptions and spooked the market. The company itself took umbrage at this as it clearly disagreed with the assumption the broker was making. Anyway, upshot is that it appears the company was right, house broker was wrong, and last week house broker was inevitably replaced.

I won't regurgitate here but Simon Thomson of IC really likes this company and has written a good review on it today post results.

Anyway long and short is they should be on £2bn of EUS by 2020 which equates to circa £20m revenue on the payments arm alone and EPS should be circling 10p+ though doesn't appear any new broker updates are out yet. Bango Marketplace and Data business are not even factored in to that and I think they could be very significant medium term.

Simon thinks price could more than double, I tend to agree. In fact I'd go further and say treble to quadruple and I don't often do that.............ready to eat my own hat now when I am spectacularly wrong :D

Graham - really nice analysis of Superdry (LON:SDRY). Very good clarity in a noisy situation. Big thumbs up from me.

I have bought and sold them a couple of times and those trades have always been poorly timed alas. Not a good share for me. I am currently long and have to say I think if anyone has a more than reasonable chance of turning this around it is Dunkerton. I like what he is doing but I think it will take time. I am hoping he has kitchen sinked the bad news, reset expectations at a low bar with a view to a few positive surprises, as that will start to rebuild market confidence but time will tell.

Paul - would also love to hear your view on the outlook / actions too. Good to contrast.

Gromley

Bango (LON:BGO) looks interesting. Growing fast, cashflow positive, stable cost base. New products ...
I'm tempted. What's the bear case?

I shorted Bango (LON:BGO) a while back - this was part of a very diversified SR based shortfolio so there wasn't any massive rationale at the outset.

I failed to maintain strategic ignorance so ended up with more of reasoned view - but as I no longer do 'conviction shorts' I didn't change position size.

I agree that there could be an interesting upside, but I'm unconvinced ( no position currently). In a nutshell :

It's still a pre-profitability start-up that offers to change the game. (Has been for 13 years)
It has, apparently, been cash-flow positive and on the verge of (real) profitability in the past.
I am sceptical that either of it's business models actually have any lasting route to profitability. To precis these are (my interpretation)

Providing the ability for the 'un-banked' to pay for content via their mobile. I don't believe that this is especially hard to do and whilst for many players it might make sense to let a third party do this for you, that only remains economic on two conditions : (i) the third party (BGO) take very little margin and (ii) there is not an even cheaper and more functional third-party just around the corner. (The approach taken 'may have been' quite ground breaking back in 2005, but I suspect it is old-tech now.)
Using these transactions to provide customer analytics data that can be sold to the likes of Google & Facebook. (No really!!)

I may well be substantially missing a trick here and I'll certainly be watching with interest to see if the actually can reach real profitability. Even if they do I would worry that there may be a very short time window between they date they become profitable and the date they become obsolete.

Just my view and I would accept that even if I am right, it is plausible that the market may once again get excited over the prospects and/or that someone (maybe one of the FAANGS?) might take them out for a multiple of the current price, if they really are doing something cleverer than I think they are.

Scaremongering

I'm betting against Superdry. I think they have a brand positioning issue, in that it has moved from a young persons brand to a "dad" brand. The younger sub 30 fashion spending market have moved away from this brand and my son's & daughter's (late teens & twenty something) reject Superdry as a product they'd purchase. I think it's had its time in the sunlight and as it's such a recognisable style I don't see a way back for it for a long time.

on a separate note and my first post I love the insight and information provided by Stockopedia.

hi Gromley - yes, I remember your diversified short portfolio. I assume that hasn't done too badly in existing market conditions for smaller caps?

Personally I think you are sceptical on Bango (LON:BGO) for the wrong reasons but time will tell I guess. I am actively looking to top up.

Firstly they have now reached cash profitability, which is the bit that counts. No debt, some cash in the bank so new tech can be developed using free cash flow. That's good. What's better is the existing tech can accommodate another £3bn EUS without further expansion - that's circa £30m of revenue almost straight to bottom line, so operational gearing has just kicked in.

Secondly the tech doesn't appear to be old hat in any shape or form. It is being adopted by all the major players and often as preferred tech. The addressable market isn't going away anytime soon - it's over 1.7bn people and it isn't just those that are unbanked either btw.

Thirdly this rapidly becomes a data business - and good quality/reliable data direct from EUS is highly attractive/valuable to companies and is likely to continue to be for some time.

Fourthly the new Bango Marketplace is very interesting. An APP developer knows that it's the 5% of users that spend money on the App and not the other 95% that use it. Bango (LON:BGO) know who the 5% are and can help target the market you, as an App developer want, globally. That means lower marketing spend for App developer. This sector is taking off.

I read stuff about obsolescence around Facebook crypto etc and I just don't buy it. Not medium term anyway, there are too many regulations, adoption hurdles, mindset shifts to contend with. If, it ever gets there Bango (LON:BGO) will likely place themselves in the chain and pivot business.
All businesses face similar business model obsolescence challenges - Big Tobacco, Oil, Electric Cars, Supermarkets etc etc so whilst I don't rule it out (there are too many business failures for that) I don't see it in the near future.

What i really feel is that the inflection point has now been passed. Todays statement confirmed that for me. I do agree on one thing though, which is that I also expect it to get taken out by a bigger fish.

It's an interesting case study either way though. I like to see shorts and longs : give's a nice balance and allows one to look at the other perspective,

I just realised that I am long but it's a very small position. Will probably buy some more now.

Thanks David. It felt like an awful lot of reading and I was disappointed to only come up with an "I don't know" conclusion, but that's inevitable sometimes. Glad that you think I offered some clarity on the situation anyway.

Best of luck with your position. I also welcome Paul's input and anyone else who can offer some new angles on it!

Cheers

Graham

Hi Scaremongering, brand positioning is an important question and an area of doubt for SDRY. I do feel obliged to point out that this doubt has been around for quite a long while. With the share price at multi-year lows, maybe it was justified all along!

Welcome to Stocko. I hope that's the first of many posts you make here!

Graham

Evening David,

Yes the diversified shortfolio has been extremely helpful to me, despite my poor execution at times and the fact that it involves more work than I had originally envisioned. In fact I have recently being doing some long term planning that has me convinced that it is going to be an essential part of my long term plan - so I'll no doubt write more on that in due course.

One of the tangential benefits has been that even when I fall off the wagon of "strategic ignorance" , position sizes are sufficiently small and diversified that I don't feel the need to be convinced or emotionally attached to the bear case - it's enough for me to feel that the bear case has a reasonable probability and that there are opportunities to exit before being wrong becomes to expensive.

So whilst I personally retain a degree of scepticism about some of the bull points you raise (in the longer term), even if I remained short I wouldn't feel a compulsion to hang on in spite of the evidence.

Personally I'm not convinced that we are at an inflection point just yet - I think there were similar positive soundings about 18 months ago (give or take).

From here, I'm probably more likely to go 'long' than 'short', although most likely of all is probably that I'll do nothing.

brianbathgate

Many thanks Graham for your comments, I sold recently on the worry that JD is too old to know what youth wants today (gosh apols not analysis proven)!!!

Yes, doing nothing is often also a good strategy too Gromley.

I'd be interested in your strategic short folio experiences if you care to jot some down, not least what & how you picked the stocks and then the strategy to exit when some inevitably have gone the wrong way. Particularly the lack of emotional attachment, which is a great trait to have.
Something I always feel is missing from my trading but never quite got round to doing much of it for fear of getting it wrong I guess. I wanted to short Tesla on pure valuation grounds a few months back in the $340 range but missed that as I didn't want the volatility of a spread short. Same with Beyond Meat which is similarly ludicrously over-valued but continues its inexorable rise.

jonesj

32 years after my first long position, the only stock I've shorted so far is Tesla. It's a car company, operating in the least profitable segment of the business (EVs), with no scale, apparently poor product quality and the management operate on a whim. All the big makers are now launching competing products.

It's still irrational for me to stock pick in the biggest and allegedly most efficient stock market in the world (US), but just occasionally I do so.

The more interesting question for me is what method do people use to short stocks ?
So far I've used an IG spread betting account. On the basis that it's easy & tax free.

Are others favouring "borrowing" stock, using options or some other method ? And who do you use for that ?

xcity

11th Jul '19

I found the Superdry (LON:SDRY) comment interesting. I've never held, so have no axes to grind either way. I've since looked through the numbers for the last 10 years. Hard to disagree with the view that the previous management were mismanaging. What Dunkerton has said makes sense. And there should be good operational gearing if he can get things to turn up.
BUT
It's all about the product. And I can't think of a way of my developing a reasonable opinion on whether it is going the right way. Trialling and running winners makes sense. But nothing he can do here will impact the first half. And will Dunkerton's market feel be as good as it was?

If I do nothing now, I might look to buy on poor first half results, but they might not be that poor if he finds enough management quick wins.

I hear the magic sound of dither.

FREng

14th Aug '19

It looks as though it may have been. Significant rise since then and a new deal with Spotify.

Small Cap Value Report (Wed 10 July 2019) - SDRY, EQLS, AFX, TEG

Superdry (LON:SDRY)

Dunkerton's statement

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Graham Neary

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