Small Cap Value Report (Wed 13 Dec 2017) - placeholder

Wednesday, Dec 13 2017 by
20

Good morning! It's Paul here.

It's going to be a more relaxed writing day today. I'm still reeling, after having to write 6 sections by 10am yesterday, which nearly killed me! I'm 50 next birthday, so maybe it's time to slow down a bit, on several levels?!

As you know, I'm not a morning person. I have a London meeting after lunch. So the plan for today is to write a couple of sections here in the morning, then a couple more sections in the later afternoon/evening.

Hope that's OK. Best wishes, Paul.


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72 Comments on this Article show/hide all

leoleo73 13th Dec '17 13 of 72
13

Best Of The Best (LON:BOTB). As many will have seen, they had an announcement (effectively) about a) paying higher rates of tax and b) switching from paying special dividends to making share buybacks.

Taxation

They say they are now liable to RGB betting tax. As I understand it they previously claimed their "spot the ball" competition was a game of skill and therefore exempt, but (along with Spottech) decided to have it both ways and claim it was a game of chance to avoid VAT. The RGB rate is 15% of gambing profits. Assuming no VAT was already planned for then I make this an extra 12% of tax on pre-all-tax profits, or to put it another it is an increase of 60% in overall taxation.

What confuses me about this is:
a) why this is news? - isn't this a natural result of spot-the-ball being a game of chance? I can understand the brokers not picking this up as it is a small company and not worth researching in detail. Perhaps we (shareholders) should have picked it up, but speaking for myself my holding isn't sufficient to justify the time of looking into things in that much detail. But certainly the company should have known this was a significant risk nearly a year ago, either through advice from those handling the VAT reclaim or otherwise.
b) why they say this will be higher taxation rate than paying VAT when they'd already agreed not to pay VAT?
c) why aren't HMRC going after them for back payment of betting taxes?

Overall I think the lesson here is that taxation of betting companies (like natural resources companies) has been and will continue to be volatile and that ruses such as claiming spot-the-ball is a game of chance should not be relied however long they have worked in the past.

On the plus side, this ruling may remove a perceived constraint on them running other games.

Share Buybacks

In the past they have paid generous special dividends, albeit at rather unpredictable intervals. My perception was that the detailed timing of these was as much about the financial requirements of the majority director-shareholders as the level of cash built up. Certainly that's how I pay dividends the limited company I 100% own. I have long thought that from a personal taxation point of view they would be better having BOTB do share buy-backs and then selling some of their shares for a capital gain. (income tax is 45%, capital gains is 28%).

Therefore I suspect today's announcement of a share buyback may not be an indication that they think the company is undervalued, but rather so they can sell shares and retain the same percentage holding. However, I don't think this disadvantages shareholders in general and should benefit some shareholders holding outside of a SIPP / ISA. Time will tell whether the share buybacks reduce/replace special dividends and whether directors sell small quantities of shares.

Alternatively, the buybacks could be a prelude to taking the company private (as it will concentrate the director shareholdings). While this would be more of an indication they consider it undervalued, this would almost certainly be bad for shareholders.

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pck76 13th Dec '17 14 of 72
2

In reply to post #252918

Another request for Idox (LON:IDOX) here please

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Gromley 13th Dec '17 15 of 72
2

Probably not enough concrete information for any meaningful comment, but just to note Zotefoams (LON:ZTF) (last discussed here on 1st Nov) today announced an exckusive deal abd strategic partnershio with Nike. Shareprice up 13%

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daveinthelakes 13th Dec '17 16 of 72
4

In reply to post #252998

Best Of The Best (LON:BOTB)

As they pay betting tax and, no matter how they dress it up, their operation is gambling how is it that a good number of their winners are from the USA where ir is illegal for foreign gambling companies to operate? I doubt if all the US winners bought a ticket at the airport more likely via the online operation.

Is there a risk of the US government taking action against them?

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Zipmanpeter 13th Dec '17 17 of 72
1

I would also request Best Of The Best (LON:BOTB) with thoughts on what happens if the free float gets even even smaller/disappears. I am weighing up my options as a holder.

Despite the tax issue, the business opportunity still looks very good (if not being chased aggressively). However, the investment opportunity looks much shakier. This distinction is not something I thought about when I first started buying shares.

I now feel exposed as a small shareholder with family control is what is such a small firm that seems to lack ambition and perhaps managerial talent to go to next level. Now it is well known and a bit bigger, who believes it would now list if it were not already listed? What would happen to the price if it were taken private. Can the owners offer a riduculously low offer and simply vote it through round the kitchen table.

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seadoc 13th Dec '17 18 of 72
7

Purplebricks (LON:PURP) A bridge too far? Looking first at just UK, after three and a half years. Gross margin is high and maintained at 56% The revenue has doubled and has now moved in profit for H1, just. But last year most of the loss was in H2. However this H1 profit is less than 10% of revenue and represents about 1/3 marketing and about 1/3 admin, in UK. Factoring in Auz and USA this UK profit is about half loss in Auz and also half loss in USA hence the loss overall. In the last year they have raised just over £50m and already spent £35m of it. As I said H2 was not nearly as good as H1 last year so clearly more funds needed in next 6/12. I could understand that funding world wide on basis of booming UK would be a good plan but I am not sure it will work, firstly UK not booming, hardly whimpering and there are grounds to think Auz and USA will not behave in next three years exactly like UK in last three years hence my question - is this a bridge too far? Just a feeling, I am short 1p a point so hardly the last of the big betters!

Regards,

Seadoc

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leoleo73 13th Dec '17 19 of 72
7

In reply to post #253018

Best Of The Best (LON:BOTB)

Yes, I think as a gambling operation they now have a number of problems.

US law is extra-territorial in a number of ways, and I would say taking money from US citizens on UK soil is a high risk, even before you start delivering their prize to the US or taking bets online (regardless of where they are situated). Also US card providers are likely to block payments to them (perhaps this can be got around at a cost using one of these payment intermediaries that have been making so much money recently?).

Here's a quote from their terms and conditions: https://botbumbraco.blob.core....

The Competitions are open to all persons aged 16 and over and the age of majority in their
country of residence

Well, in the UK the age of majority is generally given as 18, but the strong implication is they would sell tickets to UK 16 year olds which I think is now illegal. Their FAQs still claim it is a game of chance. As far as I can see their T&Cs allow a US citizen in the US to gamble online.

Overall it would appear that their T&Cs are inadequately drafted for a gambling operation. Potentially sorting this out could throw up all sorts of nasties. In a worst case they could be required to suspend sales.

In their last annual report (less that 6 months old), there is no geographical breakdown, no warning of tax risks, but there is a warning about regulatory risks.

I think a PE of around 20 is too high for an online gambling company and have sold.

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Ramridge 13th Dec '17 20 of 72
7

In reply to post #253043

Hi seadoc - re. Purplebricks (LON:PURP)
Roughly speaking, there are 76m owner occupied houses in the US, 15m in the UK and 9m in Australia.
So what really matters is their ability to crack the US market. On this point, the jury is out. Nothing that I have seen so far suggests they have an operating model that is a winner in the US.

Today's RNS shows a mere £100K of revenues from the US. in 1H2018. No conclusions can be drawn from this.

Personally, until I see evidence of a business model that is making real traction in the US, I will watch from the sideline.

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VegPatch 13th Dec '17 21 of 72
4

In reply to post #252893

Couple of things on BOTB from me

1. This has always been a v illiquid share, bid/offer spreads of 7-8% not uncommon. I once tried in c2012 to buy the shares at 30p. I tried for 2 weeks but literally no shares traded. I am not sure the decision to buyback shares helps this illiquidity.

2. EV at 230p, if you assume that BOTB wins the HMRC case is 230p * 10.2m shares = £23m minus proceeds of HMRC rebate c£3m (post advisor fees and tax) = £20m. Net cash £2m. so all in EV c£18. 2019 PBT of £1.2 = £1m PAT = 18x PE. Not a giveaway yet...and also assumes they win the HMRC case

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bwakem 13th Dec '17 22 of 72
3

The worst thing about the Best Of The Best (LON:BOTB) RNS for me is the admission that they don't expect to grow over the next few years buy the inclusion of 2018/2019 profit numbers. For me this means the p/e must drop from a growth p/e to a stagnant p/e. I nearly bought some of these a few weeks ago but I now see fair value at well under 200p.

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FREng 13th Dec '17 23 of 72

There's a reassuring TU from Parity (LON:PTY) this morning that has led to a sharp jump in price. There's not enough detail to analyse, but PTY has a very low P/E, new management and a long track record (with commensurate customer relationships). I expect the next set of results (or an improvement in momentum) to remove the "value trap" label assigned by Stocko's computers. I'm long.

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ACounsell 13th Dec '17 24 of 72
1

Any thoughts on Cohort (LON:CHRT). The dreaded 2H weighting again but at least high proportion of revenue to meet FY expectations already booked. Also reported interims and references to prior year don't seem to be consistent with numbers posted on Stock Report unless I am missing something.

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FREng 13th Dec '17 25 of 72

It looks as though something may be happening at Defenx (LON:DFX) (Paul commented on the October profit warning). Volumes are up and the price has recovered from the low. No news that I can see. I'm wondering if it's time to pick up this fallen knife ...

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Housemartin2 13th Dec '17 26 of 72
8

In reply to post #253048

Well there are some good points re Best Of The Best (LON:BOTB) on this site today, in particular leoleo73's analysis. I have a small position but the RNS and the flesh put on it by the commentary here shows to me that I have given too little analysis to this company and makes me wonder if I have done too little elsewhere. Very salutary

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Johnny2509 13th Dec '17 27 of 72

Another for Cohort (LON:CHRT). The forecasts look fairly encouraging.

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seadoc 13th Dec '17 28 of 72
1

In reply to post #253138

FREng,

Knives that have fallen are much safer than those still falling! FWIW, I would wait until the 200d has fallen a bit further, say 45p and below 20d and 50d. Your choice, good luck if you have a  punt but just make sure that the kids have not used up all your sticky plasters! Seadoc

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Arturo82 13th Dec '17 29 of 72
1

Another request for IDOX please.

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ACounsell 13th Dec '17 30 of 72

Re-reading Cohort (LON:CHRT) profit & loss numbers see difference between forecast EPS and reported EPS is down to multiple adjustments! Consequently adjusted EPS in line with full year projections as per Stock Report.

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andrea34l 13th Dec '17 31 of 72

Acquisition announced by TP (LON:TPG) today, which looks reasonably priced to me:

TP Group (AIM: TPG), the specialist services and engineering group, is pleased to announce the acquisition of the entire issued share capital of Polaris Consulting Holdings Ltd. ('Polaris') for an initial consideration of £1.5 million, with a maximum additional £2.0 million payable on delivery of profit related earn-out targets over the first 21 months from completion...

...Polaris reported revenues of £3.5 million and profits before tax of £0.4 million in the financial year ended 31 August 2017. As at 31 August 2017, Polaris had gross assets of £1.2 million...

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ed_miller 13th Dec '17 32 of 72
4

In reply to post #253038

Re Best Of The Best (LON:BOTB) "...who believes it would now list if it were not already listed?"

- Not me!!

"What would happen to the price if it were taken private? Can the owners offer a ridiculously low offer and simply vote it through round the kitchen table?"

- I doubt anything would stop them. It is getting my fingers burned from a similar situation in the past that means I am not a Best Of The Best (LON:BOTB) shareholder now (I have no position in it at all).

A similar question from me: How quickly would BOTB be taken private if a profit warning or other unwelcome news hit the share price significantly? Pure speculation from me, but it wouldn't surprise me if in such circumstances outside shareholders were left regretting their purchase of BOTB, where the free-float shows no serious commitment to a public listing and to what is good for outside shareholders. Indeed, some time ago Paul Scott interviewed BOTB founder and CEO, William Hindmarch, and passed on a suggestion from me that if he wanted to show a commitment to a public listing and respect for outside shareholders then key shareholders ought to consider selling some of their shares to increase the free-float to a minimum of 30%. Mr Hindmarch said that he floated BOTB at least in part because it lent it an air of respectability (I'm paraphrasing here but the gist is accurate. Though I don't think an AIM-listing can lend any respectability in the view of those familiar with some of the frauds, shams and tin-pot never-nevers listed on AIM alongside many proper businesses, most people with little involvement with the stock market will not realise that.). Hindmarch also indicated he had no intention of increasing the free-float, and hence liquidity, in consideration of outside shareholders.

Regards,
Ed Miller

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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 Stockopedia.com on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »

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