Small Cap Value Report (Wed 15 Nov 2017) - ABDP, GMD, WEY, WGB

Tuesday, Nov 14 2017 by

Hi, here's the usual placeholder article for use in the morning.

Just a quick reminder - I'm only really interested in commenting on small caps which have issued trading updates or results statements on the day.  Regards, Paul.

Good morning! Thank you for the reader comments today, requesting me to look at particular companies. Thank you also for mainly keeping them on topic - i.e. small caps, which have issued trading updates or results statements. I don't comment on day-to-day share price movements, just to be clear, only on significant announcements.

Ab Dynamics (LON:ABDP)

Share price: 732p (down 4.0% today)
No. shares: 19.2m
Market cap: £140.5m

Final results - for year ended 31 Aug 2017.

The company is;

... a designer, manufacturer and supplier of advanced testing systems and measurement products to the global automotive industry

There's a very good recent video here, of ABDP management presenting at a ShareSoc growth company seminar, which is well worth watching.

As you can see from the Stockopedia graphs below, there's been a good progression in sales & profits. However, the PER has become very warm now - see the 4th graph below - the PER has inflated considerably. A lofty PER may not be sustainable, and very much requires continued out-performance. This looks a small company for £140m market cap. So I'm approaching today's results with an initial view that this share might possibly be too expensive after big rises? It's almost 5-bagged since Jan 2015.


My fears are already receding, as the highlights section below shows strong growth;


Outlook comments - light on specifics, but the order book & visibility comments are reassuring;

Since its formation in 1982, Anthony Best Dynamics has gone through many changes to establish itself as a market leader in its targeted segments within the automotive R&D market. Our customers remain very active in introducing Advanced Driver Assistance Systems and in the development of semi and fully autonomous vehicles.
Our order book is at a record level and we have visibility into the third quarter of our new financial year. Alongside our enhanced facilities and the potential of our new product pipeline, the Board remains confident…

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AB Dynamics plc is a holding company, which is engaged in the provision of testing systems to the global motor industry. The Company is a designer, manufacturer and provider of testing and measurement products for vehicle suspension, brakes and steering to the global automotive research and development sector. Its geographical segments include the United Kingdom, Rest of the European Union, North America and Rest of the World. It designs and manufactures specialized testing systems to produce equipment for its customers to develop suspension, brake, chassis and steering systems; evaluate vehicle dynamics and safety systems on the track; employ driver in loop simulation for prototyping; develop and evaluate the next generation of safety systems in vehicles; test and evaluate the technology for use in future driverless cars/autonomous vehicles, and carry out end-of-line noise/vibration (NVH) testing of power train assemblies. more »

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GAME Digital plc is a retailer of video games. The Company operates approximately 580 stores across the United Kingdom and Spain. The Company's segments include UK, Spain, and Events, Esports & Digital. Its UK and Spain segments are engaged in the sale of hardware, software, accessories and digital. Its Events, Esports & Digital businesses include SocialNAT and Ads Reality Limited (Ads Reality). The Company's activities include multichannel retailing and merchandising; supply chain management and distribution; software and technology development; marketing and customer relationship management (CRM); sourcing and procurement from suppliers, as well as range of individual customers; event management and production, and training, development and employee engagement. The Company's subsidiary undertakings include Game Retail Limited, Game Stores Iberia SLU, Multiplay (UK) Limited, Game Esports and Events Limited, and Game Digital Solutions Limited. more »

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Wey Education plc is a holding company. The Company, through InterHigh Education Limited (InterHigh), operates online independent secondary school in the United Kingdom, offering The International General Certificate of Secondary Education (IGCSE), AS Levels and A Levels. The Company's subsidiaries include Wey ecademy Limited, Wey (Newco 1) Limited, Wey (Newco 2) Limited, Wey (Newco 3) Limited and Wey (Newco 4) Limited. more »

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

75 Comments on this Article show/hide all

Gromley 15th Nov '17 56 of 75

In reply to post #241223

Hi Beginner,

Just my thoughts on the retailers topic in response to yours.

it seems to me that if we take the long view there are already some bargains to be had.

I fully agree and even if some of those don't actually make it out of  the other side of the "slowdown", I do think the risk reward is beginning to look pretty good.

but the sector looks interesting if uncertain. Is everyone else just deploying their bargepoles?

Personally I'm not deploying (many) bargepoles, but rather cautious interest.

As you say there are still uncertainties to come, so if you buy now you could be buying at or near the bottom or you could be buying only part of the way down - which still is likely to give decent results in the fullness of time.

In the past I've called positions like these well enough to do "quite well", but when I review my past performance I have almost always bought to soon, it has often taken far too long to be vindicated. If I had been more patient I could (maybe if I was very lucky) have bought at a lower price, but I could certainly (with the benefit of hindsight!!) have bought at or perhaps slightly above the price  I did but with a much shorter wait to be vindicated. So that's why my personal focus is much broader now than "is this a screaming bargain?"  but now encompasses "What is going to cause the wider market to cotton on to the value".

For the retailers I think the first possible opportunity has to be  Christmas trading announcements, as there is so much nervousness about how negative wage growth might impact the Christmas sales season. In fact though recently the market seems to have grown gloomy not just about UK retailers, but many companies primarily exposed to the UK economy, so it might be that the net should be cast wider than just retailers and also that it will take a later event to reinject some degree of market confidence.

I should very much stress though that these are just my personal musings on the subject and I'm no guru - so I'm offering this as "food for thought" not advice.

But getting back to BARGEPOLES - you mentioned Laura Ashley Holdings (LON:ALY) - my extra long bargepole IS deployed here, there are a number of red flags I seem to recall surrounding (1) Structure & personnel of the Board of Directors, (2) A property in Singapore in which a large part of the companies resources were invested and (3) Advisory or Auditors (can't recall) who have been associated with some questionable company failures in the past.

Anyway  - waffly I know but I hope it was useful / interesting. (But do remember DYOR !)

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FREng 15th Nov '17 57 of 75

In reply to post #241368

I see - that's members only content and I once signed up to ShareProphets free three months and received so much unwanted email that I rapidly cancelled.

I take it that Winnifrith has changed his mind since the recent time that he was telling readers to buy Falanx (LON:FLX).

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Laughton 15th Nov '17 58 of 75

In reply to post #241223

Beginner...funnily enough having noticed that you have a pink heading on your posts I did ask Stockpodeia why that was and the answer is that if you click on the bear side of netral you get a pink header. I can't remember what you get if you click that you're bullish (maybe blue or green?).

But you seem to be the only person who actually clicks either.

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bestace 15th Nov '17 59 of 75

For me the GAME Digital (LON:GMD) investment case still rests to a large extent on the BELONG gaming arenas. I'm not so fussed about their traditional retail activities which looks like a declining cash cow that should plod along OK absent an armageddon scenario, and on a manageable basis given the extremely short lease lengths, so any upside from that is a bonus.

At the last interims they were quoting capex fitout costs for the new BELONG sites of £50k - £100k with a 6 - 18 month payback and 12% operating margins. I'd previously calculated this to imply a £75k contribution from each site, taking the mid point of those ranges.

From today's results presentation (slides 39 - 41), looking back at the 18 sites opened to date, they have cost on average £99k to fit out with a contribution per site of £74k giving a 16 month payback period.

However there is quite a large variance between the largest sites (24+ desks) and the smallest sites (c.15 desks or even as low as 12 desks). The obvious strategy would be to focus on opening larger sites as they produce the best unit economics: for those sites, the average fit out cost is around £125k which pays itself back in 12 months. So despite costing more to fit out than originally envisaged, those larger sites contribute significantly better (by around c.70 - 80%) compared to the average.

Come the end of 2017/18 when they are targeting having 35 sites open, a £75k average suggests total contribution of around £2.6m on an annualised basis, but it could go much higher than that given the minimal marketing spend to date, the fact that the sites are new and therefore still maturing, and if they focus on opening larger sites. All the metrics are pointing in the right direction:


Although one should be cynical and assume these metrics are only included in the presentation precisely because they are pointing in the right direction, it seems pretty clear that it is taking a while for sites to mature - my rough calculation suggests maybe a 30% utilisation of available desk space, so who knows how much each site might be contributing by the time they have had time to establish themselves and push up that utilisation rate?

If they could raise the average contribution per site to £150k, those 35 sites would make a contribution of £5.3m; £200k per site (their best performing site is already earning this much, paying back its fit out costs in 9 months) would contribute £7m. etc.

On margins, they haven't mentioned this today as far as I can see other than to describe it as a "new high margin business model". The charts above imply they earn around £3.50 per hour played, which seems about right in the context of their charging structure of £5 for a one hour session up to £25 for a 10 hour all day session (as always, London costs more, at £8 for a single hour or £50 for the full day). The £314k of gaming revenues in Q1 of FY18 in the chart above clearly isn't directly comparable to the average site contribution of £75k per annum, but it feels like a pretty high margin business.

Roll forward a couple of years and let's say 70 sites x £170k per site would be £12m of contribution which compares to the £14m EBITDA they made from their core retail activities in FY17. Maybe that's comparing apples and oranges, but the point is that at the bottom line, these BELONG sites can rapidly scale into a significant profit generator for the group as a whole, even if their top line contribution looks relatively meagre compared to the existing lower margin retail operations.

The other thing I picked up from today's webcast was on cash: there has been some speculation that the healthy cash balances reported at the 6-monthly intervals are masking a significant deterioration in the cash position at other points in the trading cycle.

However the FD said today that they weren't using and had never used the £75m bank facilities in the UK since they re-listed, and the Spanish facility was currently at around its maximum cyclical usage (at around €20m of a €40m facility) in the run up to the peak-trading season, so they would appear to have plenty of cash and available facilities to tide them through any retail downturn.

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Beginner 16th Nov '17 60 of 75

In reply to post #241418

Many thanks L
I will click the bull now, and we shall find out!!!

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Paul Scott 16th Nov '17 61 of 75

In reply to post #241178

Hi Gromley,

just one other minor stylistic point - when you write the first bit of content of the actual articles, is it possible to delete the original "placeholder" sentence / paragraph. I'm probably come over all OCD, but I think it just makes the articles look a little less "polished."

I was wondering about that myself. I might follow up your idea, and delete the placeholder introduction once the main article is up. But leaving it there might have initially helped people understand the new process of us putting up placeholder articles the night before.

Regards, Paul.

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Beginner 16th Nov '17 62 of 75

In reply to post #241383

Thanks Gromley, much appreciated. Laura Ashley Holdings (LON:ALY) also has a near-controlling shareholder who is involved in a very unpleasant and potentially expensive divorce. Something will have to be sold off to cover this!!! Yes, unfortunately there is something amiss here. Timing is indeed everything. Unfortunately mine is invariably off, so a wait for the Christmas results may well be the best option here.

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catalogue 16th Nov '17 63 of 75

Paul, thank you very much for the Walker Greenbank (LON:WGB) comment. It is just one of the bonus features of the Stockopedia offering that really matters when you need it, especially when you are explaining to family what has happened to one stock or another. Of course it is only an opinion and DYOR caveat et al.

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Paul Burkitt 16th Nov '17 64 of 75

I sold off virtually all of my direct consumer facing stocks over the last 12 months - which was a good move. I kept my investment in WGB primarily due to their exposure to the US market - would partially insulate them from any downturn in UK sales. Wrong! A buzzer did go off in my head when John Lewis said trading was awful in October, but did nothing. The important London housing market is not likely to get any major boost anytime soon, with bankers etc decamping to Frankfurt/Dublin/Paris. Even if they do not go, the uncertainty over BREXIT will still reduce the number of high value housing transactions, reducing demand for posh wallpapers! I need to pay more attention!

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ryanc106 16th Nov '17 65 of 75

Fantastic artice as usual... Thanks Paul

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Effortless Cool 16th Nov '17 66 of 75


You make the following comment on the controversial level of share-based payments at Ab Dynamics (LON:ABDP).

"Share based payments - looks high, at £1.46m. Note that the growth in profit is only achieved by ignoring this cost. Once you take this into account, then operating profit only rose 0.6% to £4.4m. So this effectively means that employees got all the benefit of the underlying increase in profits".

One thing to bear in mind in respect of these option awards is that the biggest "loser" from the issue was Anthony Best himself, who was Executive Chairman at the time. His family interests own over 30% of the equity and he took no share of the options.

In other words, the person who took the decision to issue the options is closer than anyone to the business and the people, and stands to lose more than anyone else through overgenerous remuneration of staff. He clearly saw value in rewarding his team (all employees were eligible) in this way, and the subsequent performance of the business has done nothing to suggest he got this wrong.

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Wimbledonsprinter 16th Nov '17 67 of 75

In reply to post #241433

I too am looking at GAME Digital (LON:GMD) but also had decided to wait till Christmas trading (seems a bit too common of a theme here - everyone waiting for the same catalyst).

But other (somewhat) negatives putting me off buying for now are:

* The huge seasonality -H1 GTV is nearly double H2 - and working capital cah flow only amplifies this movement. End-Jan cash amounts are presumably close to a peak (Chistmas purchases made but some suppliers still to be paid).

*. Thanks for pointing out the use of the banking facilities. Again this highlights the seasonality of the business. I am under the impression that in FY 2017, the banking facilities were not used at all - so if now they are using the Spanish ones upto eur 20 million, then the position is tighter than last year. Unfortunately, the company does not publish an average cash balance for the year. Therefore I haircut the reported cah positions at end July and end- Jan.

*I went to the BELONG in Waldour Street a few days ago and to me (admittedly far from the target demographic), it looked like a dark gloomy basement with some high end machines and expensive gaming chairs.

On the positive side - one point that I have not seen mentioned - is the planned sale of the still loss-making Multiplay digital enterprises (£4.5 million of sales). Multiplay (including its esports and events business) was bought by Game at around 4x sales not so long ago - so they might receive a decent sum for this.

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Wimbledonsprinter 16th Nov '17 68 of 75

In reply to post #241233

There was post by EffortlessCool and a discusssion of the adjusting for the cost of share option by Ab Dynamics (LON:ABDP) on 26 April.

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herbie47 16th Nov '17 69 of 75

In reply to post #241728

Thanks for that, I have commented on it before and is one reason why I sold, thanks for reminding me. I see Stcokopedia now has Ab Dynamics (LON:ABDP) as a momentum trap.

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Effortless Cool 16th Nov '17 70 of 75

In reply to post #241748

Yes, I noticed that ( Ab Dynamics (LON:ABDP) ), and two days ago they were certainly right.

The driver of the change in category from 'High Flyer" seems to be the fall in their "quality" rating. A big part of the cause of this is the reduction in free cash flow due to the expenditure on the new factory and land, so at least this is a good reason. The reduction in ROCE due to the share-based payment charge will also have had an impact.

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herbie47 16th Nov '17 71 of 75

In reply to post #241763

I thought it was the Quality rating that had fallen to make it change?

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Effortless Cool 16th Nov '17 72 of 75

In reply to post #241778

Thanks - you're quite right. I've corrected the original now. The comments still stand, just typed the wrong rating.

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iwright7 17th Nov '17 73 of 75

I see Panmure have really stuck their neck out and have upgraded Ab Dynamics (LON:ABDP) to a target price of 1030p. Better they are predicting an annual growth rate of 28% over the next 3 years. If they are right AB is not a momentum trap and is looking at substantial growth.

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lemonjar 22nd Nov '17 74 of 75

Re. GAME Digital (LON:GMD) , someone posted this Edison research note over on advfn,

all awfully positive. I'm curious what sort of reputation or weight people think these Edison reports have? (the only other one I took an interest in a little while back was on Nanoco, and on that occasion rather glad I didn't act on it)

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rhomboid1 23rd Nov '17 75 of 75

In reply to post #244268

Re GAME Digital (LON:GMD) you might want to bear in mind that mgt think the dividend is optional but disgracefully generous share awards essential
Uninvesteable for me now

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


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