Small Cap Value Report (Wed 11 July 2018) - BRBY, SWL, ORCH, SFE, BLTG, SOS

Wednesday, Jul 11 2018 by

Good morning!

Football is the major story today. There's also quite a lot of stock market news:

10:30 AM: I have taken Alpha FX (LON:AFX) off the list, because it's an "in line with expectations" update. I've also taken Fishing Republic (LON:FISH) off the list, because its market cap is so small. Paul will be in touch soon with his thoughts on Sosandar (LON:SOS).

12:45 PM: Ditched a few more.

It's too big for this report, however one of my top holdings Burberry (LON:BRBY) released a Q1 trading statement that was in line with expectations.

Retail revenue was flat due to currency headwinds, or +3% at constant FX. "Comparable sales", which includes online sales and is measured at constant FX, was also +3%. There was no change to guidance, except that current exchange rates are more favourable. It remains on track for £100 million of cost savings.

The share price is down 4.5% as I type. Investors were evidently pricing in a little extra. There is also continued uncertainty to be faced as the company beds in a new Chief Creative Officer and responds to weak trading in the UK, Europe and the Middle East.

Personally, I continue to hold. These shares have been in my portfolio since January 2016, and I would like to keep them for the foreseeable future.

Swallowfield (LON:SWL)

  • Share price: 275p (-13%)
  • No. of shares: 17 million
  • Market cap: £47 million

Trading Update

This is of particular interest to me, as I own shares in the similar company Creightons (LON:CRL). Both are engaged in the manufacture of personal care products, and manage their own brands.

Today's full-year update is broadly in…

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

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Burberry Group plc is a manufacturer, wholesaler and retailer of luxury goods. The Company also licenses third parties to manufacture and distribute products using the Burberry trademarks. The Company's segments include retail/wholesale and licensing. The Retail/wholesale segment is engaged in the sale of luxury goods through Burberry mainline stores, concessions, outlets and digital commerce, as well as Burberry franchisees, prestige department stores globally and multi-brand specialty accounts. The Licensing segment is engaged in the receipt of royalties from the Company's partners in Japan and global licensees of eyewear, timepieces and European childrenswear. The Company's product divisions are Womens, Mens and Childrens apparel, Accessories, and Beauty (which includes fragrance and make-up). Its subsidiaries include Burberry Latin America Holdings, S.L, Burberry (Suisse) SA, Burberry (Taiwan) Co Ltd, Burberry (Thailand) Limited and Burberry FZ-LLC. more »

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Swallowfield plc is a United Kingdom-based company, which is engaged in the development, formulation and supply of personal care and beauty products. The Company has presence across other European Union countries and rest of the world. The Company offers its products in various product types, such as personal care aerosols, hot pour, premium liquids/tubes/roll-ons, fragrance and gifting, and color cosmetics and pencils. The Company's manufacturing, filling and aerosol packaging capabilities include traditional system in tin-plate or aluminum cans to bi-compartmental systems, such as bag on valve (BOV) and bag in can (BIC). The Company offers its products in various brands, such as TRU SHAVE and MR JAMIE STEVENS. The Company offers a range of services, such as project management, sourcing, manufacturing and logistics. The Company offers warehouse facilities for chemicals, raw materials and finished goods, as well as a global distribution network capable of bespoke delivery. more »

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Orchard Funding Group plc is a finance company. The Company specializes in insurance premium finance and the professional fee funding market. The Company provides funding and funding support systems to insurance brokers and professional firms through the trading subsidiaries. The Company's segments include insurance premium funding and professional fee funding. The Company provides finance to clients of insurance brokers. The Company has two businesses: Bexhill UK Limited and Orchard Funding Limited. Bexhill UK Limited provides insurance premium funding to the United Kingdom insurance brokers. Bexhill UK Limited provides credit to limited companies, partnerships and consumers. Orchard Funding Limited provides professional customized fee funding solutions to accounting firms, professionals and small businesses, enabling them to provide extended credit to their business clients. more »

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

42 Comments on this Article show/hide all

tomps3 11th Jul '18 3 of 42

Ilika (LON:IKA) Proposed placing to raise not less than £4m and an open offer to raise up to £1m. Graeme Purdy, CEO, outlines the detail:

Ilika are are all about solid state batteries. The fund raise will be used with grants to commercialise the IP developed so far, to take forward into licensing agreements.

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abtan 11th Jul '18 4 of 42

Only a brief look at the Sosandar (LON:SOS) results, but the comparatives look to be 7 months vs 12 months?
Shame this wasn't explicitly stated + it makes it difficult analyse + exaggerates the growth figures
Not a holder

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Clementwether 11th Jul '18 5 of 42

Orchard Funding (LON:ORCH) please. You have covered before and today we have news that the planned banking licence application has been submitted and they hope/expect it to be granted by the end of the year. An opportunity to broaden funding base, reduce cost and scale up, but they sound like they will take it slowly, which is fair enough. A real chance of growth in the medium term I would hope.

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MrContrarian 11th Jul '18 6 of 42

My morning smallcap tweet:

Ilika (LON:IKA), Fishing Republic (LON:FISH), PCI- PAL (LON:PCIP), Swallowfield (LON:SWL), Safestyle UK (LON:SFE), Frenkel Topping (LON:FEN)

Ilika (IKA) £4m placing and £1m open offer at 20p, a 13% discount. Needed for larger battery development but mainly for keeping the lights on (£3m). "Ilika has now extended its commercialisation roadmap to include large format Stereax cells for automotive power and now intends to build a new pre-pilot production line." I don't see how the orders of magnitude increase in capacity will be achieved. The Stereax M250 cell (albeit very small) has 10,000 less capacity than a typical Li-on cell.
Fishing Republic (FISH) guides H1 rev £3.4m (£4.1m). Store LFL -22%. Q1 margins below the Company's expectations mainly as a result of clearing old product lines. They knew they were doing that, right? Q2 margins improved, close to 2017. Absurdly slow reporting of dismal Q1.
PCI PAL (PCIP) guides FY broadly in line with expectations. "Our stated strategy is to focus on the channel sales route to market, evolving away from our previous mainly direct sale route. I am pleased at how quickly this evolution is happening albeit that we are still learning the timelines of the contracting, testing and go-live process."
Swallowfield (SWL) guides FY broadly in line with expectations. Rev flat but pre-tax significantly up despite underlying operating profit marginally behind last year. F/V is for rev up 1%,
Safestyle UK (SFE) warns FY rev below market expectations and small U/L pretax loss. Blames weaker consumer spending, loss of significant numbers of canvass, sales and installation staff to the new competitor.
Frenkel Topping (FEN) warns H1 operating profit halved YoY and FY profit below market expectations.

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runthejoules 11th Jul '18 7 of 42

Sosandar (LON:SOS) thirded. Wish I'd bought more at 11p!

Also wondering if anyone had any thoughts on Frontier IP (LON:FIPP) (no position), could it be the thinking investor's Tern (LON:TERN) ? '...specialises in commercialising university intellectual property, today announces portfolio company Pulsiv Solar has won a UK government grant to reach an important milestone in the development of its patented, energy-efficient solar power technology... University of Plymouth spin-out Pulsiv Solar £129,929 towards a £288,732 project... will complete the technological development of its solar micro-inverter by April next year. Frontier IP holds an 18.9 per cent stake in the Company... In laboratory conditions, Pulsiv has demonstrated its technology is significantly more energy efficient than existing micro-inverters...The aim.. efficiency improvements of at least 5 per cent over current market leaders. The micro-inverters can be used either as new or retrofitted to existing solar panels.' May investegate further.

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Paul Scott 11th Jul '18 8 of 42

Morning all!

Sosandar (LON:SOS) (in which I hold a long position) is one of my favourite shares, so I've agreed with Graham that I'll submit a section on that for today's report. I've just come off the phone with management, so will collect my thoughts & have something posted here before lunch today.

Best wishes, Paul.

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Graham Neary 11th Jul '18 9 of 42

In reply to post #381129

Hiya, Orchard Funding (LON:ORCH) is in the list, thanks for the rec. G

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barnetpeter 11th Jul '18 10 of 42

Sosander....holding from when they used to be a gold stock and added earlier this year. Target of 100 pence to sell any. May take two years. Celebrity section on their website shows all the Loose Women from the daytime tv show wearing sosander fashion. I wonder if they have a deal with the show or producer?

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ls2g08 11th Jul '18 11 of 42

Griffin Mining (LON:GFM) announced a couple of minutes ago that they have signed the contract for the zone II Caijiaying Zinc-Gold mine. Up 4.2% at time of writing.

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ppdrs 11th Jul '18 12 of 42

In reply to post #381204

Hi Is2g08
I'm not sure Graham covers mining stocks here. I too hold Griffin Mining (LON:GFM) - was surprised that the impact on SP was so modest, given how far back it's fallen from it's recent highs. Happy to continue holding though...

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vik2001 11th Jul '18 13 of 42

Griffin Mining (LON:GFM) is a cash cow, I topped up after todays news as I think its still undervalued.

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ls2g08 11th Jul '18 14 of 42

In reply to post #381209

I thought he may due to it's inclusion in the NAPS. I guess we can have a discussion here though!

Up 8% now - I could see it regaining recent heights and plowing on further.

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c038644 11th Jul '18 15 of 42

In reply to post #381224

I also bought a few Griffin Mining (LON:GFM) this morning as it looks like game changing news. Seems to me this is mainly a bet on the Chinese economy. If the Chinese choose to weaken the Renminbi to counter US tariffs it won't help the SP, nor if Chinese resource consumption reduces. As ever roll the dice and hope for the best!

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Graham Neary 11th Jul '18 16 of 42

In reply to post #381224

The NAPS is a fantastic project but I can't cover every sector, so will be remaining silent on £GFM! Good luck with it anyway. G

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Paul Scott 11th Jul '18 17 of 42

Sosandar (LON:SOS) (I hold a long position in this share)

As promised, here is my take on the results today from Sosandar, an early-stages ladieswear eCommerce company, based in Wilmslow.

The historic figures are of little interest, because this share is all about growth. But for completeness, revenues for y/e 30 Mar 2018 were £1.35m, and the adjusted EBITDA loss was £3.1m. In this case, EBITDA is a perfectly reasonable performance measure, because the depreciation/amortisation charges are negligible (as it has hardly anything in fixed assets, as production/distribution/IT  are all outsourced). There is no capitalisation of IT spend either. So EBITDA is clean.

LFL revenues are up 268% for the 6m to 03/2018. That's a strong percentage, but it's coming from a very low base. Nevertheless, to be credible, an early stage growth company should be delivering triple digit growth rates, and it is.

Forecast sales - what matters most, is how revenues can be expected to grow. Happily, I was able to work out sales & growth for Q1 of the new financial year (ending 03/2019). This is possible because the narrative today tells us that Q/e 06/2018 was up 73% sequentially on Q/e 03/2018. That's a very impressive quarterly growth rate.

We can work out that Q/e 03/2018 revenues were £492k. I've calculated this by taking full year revenue of £1,353k, and decucting the 9 month interims revenue of £861k.

If we then apply 73% sequential growth, then this arrives at my forecast of £851k revenues in Q/e 06/2018. If you multiply that by 4 to annualise it, we arrive at £3.4m revenues. However, that assumes that no sequential growth occurs, which is ridiculously pessimistic. In reality, I think this demonstrates that Sosandar is heading for perhaps £4-5m revenues this year ending 03/2019, maybe more? That's way ahead of the original plan, in the Turner Pope note from when the company floated, which forecast £3.3m revenues this year. So in a nutshell, it looks to me as if Sosandar is trading well ahead of plan, in terms of revenues.

Gross margin has improved strongly too, to 49%. That's seriously good, for such a small fashion business. It's being achieved by strong sell-through at full price, and good stock control. Or put another way, its product is in demand, and they are not having to discount much to shift it. All very encouraging.

The narrative today is dripping with positives about the outlook for the business, so I am greatly encouraged. It seems to me that we have confirmation today that this business model is going to be a success. Whereas yesterday, it was still highly speculative & uncertain.

Cash - there is £4.6m cash pile. Losses & cash burn should reduce this year, because turnover & gross profit should be rising considerably. If we take a mid point of £4.5m revenues, at 50% margin, then that's £2.25m gross profit for this year. That's up from £0.66m gross profit last year, an increase of £1.6m in gross profit - which would roughly halve the adjusted EBITDA loss this year, to about £1.6m.

In reality, I doubt that will happen, because the company will want to spend more on building its team, and other growth-related expenditure. But there's little doubt that the company has plenty of cash headroom for now. It might decide to do a top-up fundraising in 2019 or 2020, but that's of no concern to me whatsover, because it would be raising cash at a much higher share price than now - from a position of strength, since investors would probably be queuing up to put money into such a fast growth eCommerce business.

So anyone wittering on about cashflow and placings, is just scaremongering. The cash position is fine, and won't be a problem unless growth stalls. The opposite is happening, sales growth is accelerating.

Overall then, as you've probably gathered, I'm greatly encouraged by today's news. I don't know how to value this share, as it's all about future growth. In a bear market it might only be valued at £10m. In a bull market I could see it being valued at £100m+, once investors twig that the business model is working. Who knows?

I'm in this one for the long-term, so the short term price doesn't really matter. It's all about backing management, and as I've said before with Sosandar, the management team is the real deal. They're experienced, and are delivering exactly what they set out to do. I recommend reading today's narrative with the figures in full, as there are lots of very encouraging things in it.

Obviously, as a loss-making growth company, this won't appeal to value investors!

Regards, Paul.

EDIT - there should be an initiation note out from Shore Capital shortly, who are the new broker (announced today). So I'll keep an eye out for that (if I can get hold of it - they're not on Research Tree unfortunately), and it will be interesting to see if their number crunching ties in with my optimistic view (based on bumper sales in Q/e 06/2018).

I spoke to Sosandar management & their advisers briefly this morning, in a telecon. I emphasised the point that PIs can't get hold of broker notes now, post MiFID II, unless brokers put them on Research Tree. They took my point on board. I do everything I can to encourage companies & advisers to get better information out to private investors, at every opportunity.

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pgs501 11th Jul '18 18 of 42

I notice you have included Burford Capital (LON:BUR) on your list and having taken a quick look at the RNS it looks positive to me, but not exactly a game changer. Petersen will be held in the US, but I think most were expecting that. It does at least reduce the risk of Argentina managing to get the case back to a non-objective court in BA.

The more interesting part is that on the secondary market Burford's holding is now valued at $800m (based on selling just 3% and they may not get that if they tried to sell the lot). It could be argued they may be stuck in for the long haul on this unless they keep selling tranches off as who has a spare $800m to buy it? I took a quick look at the 2017 annual report that stated Petersen on secondary market was $660m at that point so it is significant uplift on that individual case.

I suspect if you already liked Burford Capital (LON:BUR) this just made it even better due to the uplift in secondary valuation, and if you are not such a fan I doubt this will have changed your mind as if you value it on a NAV basis it will not have moved the needle too much.

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Pratt 11th Jul '18 19 of 42

Any chance you could touch upon AFX please? Revenue growth by 50% with Profit for year expected in line but mainly because of the spend this year to hire resources. That sounds positive to me if they continue to grow at that level whilst maintaining profit margins, especially for next year and so on.. Thoughts anyone?

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IGotPoesJacket 11th Jul '18 20 of 42

Thanks for another great report Graham :) I appreciate all your efforts on a daily basis, and big thanks to Paul for taking time in his absence to give us his view of Sosandar. I hope you're getting plenty of rest and recharging the batteries ready to provide regular commentary again.

I'm highly encouraged by the Sosandar (LON:SOS) update. I track their Facebook performance and take the time to read the comments and reviews. They're generally great and FB likes are up ~50% from 31st Dec. The customers regularly comment that they buy a lot of different items from Sos, or get the same item in different colours. It's pleasing to see the high margin products, like the leather skirts and jackets getting good reviews.

One thing that concerns me is, if they get a bad review, they get several at once. It seems to me (speculation) that they have a critical member of staff they can't do without, when they have some time of the wheels start to fall off - Paul if you could ask them about this that would be great (I don't expect any kind of response to this ask :)).
Very encouraging, I see this buying me my long dreamed of Porsche 768 in a few years :)

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Graham Neary 11th Jul '18 21 of 42

In reply to post #381264

Hi pgs, thanks for the summary on Burford Capital (LON:BUR). I took it off the list based on the view that today's news was probably expected by the majority of shareholders (the share price is almost unchanged), and I don't have any particular legal expertise or information to share in relation to the Peterson case. Appreciate your comment. G

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Graham Neary 11th Jul '18 22 of 42

In reply to post #381269

Hi Pratt, re: Alpha FX (LON:AFX) it sounds positive to me too, and it will be interesting to see how it plays out. I will keep an eye out for more detailed announcements from the company in future. Cheers. G

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About Graham Neary

Graham Neary

Full-time investor and independent analyst. Prior to this, I spent seven years in the financial markets as an analyst and institutional fund manager. I'm CFA-qualified, also holding the Investment Management Certificate and the STA Diploma in Technical Analysis.Away from finance, my main interests are recreational poker and everything to do with China, especially Mandarin Chinese. more »


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