Small Cap Value Report (Wed 17 August 2022) - BOO, PURP, COG, MOON, CINE, GHH, GATC, CFX, MYSL

17th Aug '22 by Paul Scott

45 comments 8909 reads

Good morning from Paul & Graham! Today's report is now finished.

Agenda -

Paul's Section:

See the reader comments section below, where I put up brief comments first thing, covering (as I hold these shares, I see their news first, from email alerts) -

Boohoo (LON:BOO) (I hold) - acquires 7.1% strategic stake in Revolution Beauty (LON:REVB) a few days ago.

Cambridge Cognition Holdings (LON:COG) (I hold) - announces involvement in a drugs trial with Oxford University, in which it says take up of a new voice-based testing service has been good.

Purplebricks (LON:PURP) (I hold) - another big Director buy from the Chairman, might be significant, who knows?

Moonpig (LON:MOON) - I got an email telling customers to order early, due to Royal Mail strikes. Could this damage its business, if strikes remain unresolved?

Mysale (LON:MYSL) - breaking news! Mike Ashley's Frasers (LON:FRAS) has announced a 2.0p cash bid for the company (an Australian flash sale eCommerce business). This is a 25% discount to yesterday's closing price. Although as FRAS points out, the price spiked up from 1.25p when FRAS popped up with a new 28.5% stake in MYSL on 1 July 2022, which I covered here. MYSL is a serial disappointer, so I'll be really glad to see the back of it, and not to have to waste time covering its future updates. As an entry into Australian markets, it makes much more sense for MYSL to be consumed within FRAS's vast empire, than try to operate on a standalone basis, which has tried, but failed.

Bigger sections:

Cineworld (LON:CINE) - finally concedes that it needs to restructure its technically insolvent balance sheet. The only surprise is it's taken so long. Looks like a debt for equity swap is being considered, which "will likely result in very significant dilution of existing equity interests in Cineworld". We've been warning here for a long time about this high risk share, which is a good example of why highly indebted companies are best avoided. Especially in an economic downturn.

Gattaca (LON:GATC) - an in line trading update, but forecasts had previously been slashed to only breakeven. Clearly something is wrong with this business, as it operates in the staffing space for STEM skills, which is a lucrative area for competitors. New…

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BnB

17th Aug '22

Re Gattaca (LON:GATC)

I made several observations six months ago here on post 36 of Nov 5 and here on Nov 4 post 38.

My initial thought concerns the new CEO. If ever a recruitment business needed someone to come in from the outside and introduce best practice and operational targets gleaned from experience at a combination of boutiques (focus, high margins, higher recurring revenues, better relationships) and large operators (branding, resource management, scale) then Gattaca is it. Yet they've appointed a (no doubt thoroughly deserving) candidate who is a Gattaca lifer. I respect his CV, I just don't think, based on his experience, he is best placed to execute a turnaround.

On the other hand, the company is such a shitshow that it won't be hard for him to look better than his predecessor.

Paul, another observation. I know you see value here, but you're looking at the business as an investor with an accounting background. Debt, balance sheet etc. Important stuff and you are doubtless correct to see potential for a profitable recovery. But we are both shooting in the dark when it comes to assessing what's going on in the business. My reading is that the problem facing the company is that it has gone into a decline that may be irreversible. And, since we know that the market is good, then what has gone wrong is almost certainly related to the loss of key fee earners. Successful recruiters, even the largest, thrive on the reputations and fees of a surprisingly small cohort of rain-makers. Once those leave, you are in big trouble - often terminal. With no superstars to inspire and educate the next cohort, no matter how much you add to headcount, productivity evaporates along with revenues. The competition is brutal and vast. The much discussed SThree (LON:STEM) don't have 1% of the UK market. In fact I'd be surprised if they have 0.1% of the market. There are literally thousands of competitors. So junior hires without guidance and leadership simply wither and die.

I think we see the effect of that in what, based on the assumptions in my posts from last November, is a move down-market in their niche. IT recruitment is effing difficult. Top consultants earn very high incomes, £250-£500k (possibly more today), not because it is money for old rope, as outsiders believe, but because it is so damned hard to be successful. Gattaca's staffing issues leave the company chasing roles of the lowest technical complexity while persuading the market of "our key strength of deep knowledge and understanding of our sectors and niche STEM skills" . Haha. While a top boutique will find you a security architect and SThree (LON:STEM) will find you the programmer to work under them, Gattaca will find you someone who can say "have you tried switching it on and off"

TerryHancock

Paul Pindar was previously CEO at Capita, he was instrumental in building the business from listing onwards for 20+ years and left long before things went pear shaped. Not sure I understand the full picture here but I know from direct experience he is a tough minded and driven individual who was the prime mover in making Capita a FTSE 100 company along with then Chair Rod Aldridge. Not sure if this is a good or worrying sign for retail investors!

Paul Scott

Hi BnB,

Good points, very interesting, thanks for posting.

Although as I stated in the article, the fact that Gattaca (LON:GATC) is only operating at breakeven, when competitors make good profits, is the key question - the figures are clearly telling us that something is wrong. So I think your explanation makes complete sense.

For me it's only a potential turnaround. There would need to be evidence in the numbers, and from the strategy, that things are improving in future, to make it worth backing in my view. But a sound balance sheet, and little to no dilution risk, is a good starting point for a turnaround.

As you say, maybe it would have been better to bring in a high flyer in the sector to really shake up GATC, rather than making internal promotions, that point occurred to me too.

Also I wholeheartedly agree with you that outside shareholders don't have a clue what's really going on internally. I made that point in another report earlier this week, it applies to all listed companies.

Regards, Paul.

Another point I just remembered, is that Purplebricks (LON:PURP) (I hold) Chairman recently came under public attack for the poor track record. So I wonder if buying shares in the market is designed to strengthen his position at the company?

For the avoidance of doubt, I don't see my PURP position as a great investment, it's a lousy company. But I think the shares could be an interesting special situation, at this bombed out level. So more speculative than my usual value type stuff.

Hi Paul. I was careful to use your wording “potential for a recovery” in my post so I wasn’t suggesting you were leading forum members down a dangerous path. I found your analysis of the balance sheet very interesting.

As for hiring an outsider, it’s entirely possible that Gattaca (LON:GATC) tried to do so. The problem is that the majority of the most capable leaders in the industry are also owners of their own businesses, and earning £millions. So taking over an ailing dinosaur like Gattaca (LON:GATC) makes no sense - lots of work for far less money. It is telling that SThree themselves were unable recently to find a candidate to stand up against the company lifer interim CEO. And, looking at the remuneration package this is no surprise.

My criticism of the firm is therefore a little harsh. After all, the appointment of an outsider would probably have put the noses of either of these two internal candidates so far out of joint that each company would have lost their services. But I think the criticism is valid from an operational point of view and Gattaca will need to bring in outside knowledge to help the new man deliver his objectives. I have no such concerns about SThree where Timo is the continuity candidate having built their most successful division.

garbetklb

Gooch & Housego (LON:GHH) - as share that I've looked at a few times over the years, but has always looked too expensive. So the recent drop has brought it back into focus. Without knowing the company in detail, the first thing that jumps out is the steady drop in operating margin over the last 5+ years. Wonder if anyone with bettter knowledge of the company has any thoughts?

JASVFS

Apologies on being late with this one Paul and Graham. Braemar's statement today has been received well (we hold) but I wondered how you would view the reason for the delayed results. I'm convinced by the explanation and we might add to our holding or perhaps I should wait till the 30th.

timarr

RE: Gooch & Housego (LON:GHH)

Without knowing the company in detail, the first thing that jumps out is the steady drop in operating margin over the last 5+ years. Wonder if anyone with bettter knowledge of the company has any thoughts?

I was wondering exactly the same thing. The company makes great play of its adjusted numbers, where the operating margin doesn't look too bad. Those adjustments involve amortisation of intangibles and restructuring costs. Generally I ignore the former but the latter is dependent on how rare restructuring is. Looking at their last few annual results the restructuring costs have been:

2018: £864,000

2019: £1,355,000

2020: £2,609,000

2021: £5,860,000

(I note these change a bit from year to year).

Broadly the restructuring costs look valid - but are they valid adjustments when they keep recurring - and getting larger?

On balance I'm likely to take a stake here. Most of the issues look temporary and there's a decent chance the restructuring will actually lead to margin improvements once the gating factors are resolved. But I don't have much confidence in the management's forecasting capacity - it feels like there's at least another warning in here unless the economy moves in their favour, and that's more wishful thinking than anything else.

But Gooch & Housego (LON:GHH) is another decent company, like Treatt (LON:TET) where the share price has been discounted due to management's inability or bad luck in dealing with rapidly changing economic conditions. We can allow managements a certain amount of latitude around this (let's face it, the "experts" at the BoE and the Treasury haven't demonstrated any forecasting ability either) but from here on in the bad news is in, they need to start to perform.

Focusrite (LON:TUNE) is tanking (-20%) this last fortnight on no news and against the more recent trend for calm. I like a lot about this business except for the advanced age of the founder. Anyone any thoughts?

GN100

Wynnstay (LON:WYN)

Placing for Instos only just announce, min price 550. Closed today at 610/630

Heads they win, tails we PIs lose.

https://www.londonstockexchang...

Revs8

That’s quite a discount and no chance for the small PI to participate.

Metatron

Do not get either moneyweek or inv cron but do get the Spectator and a TV Guide delivered every week and only rarely are either late.Both are also very good at anticipating problems in December with Xmas. Inv Cron and Moneyweek should be able to sort out the problem if the management step up

Boon

So that's why I got a 40% off cinema tickets email from Cineworld (LON:CINE) last week!

The soft film release schedule must also be an impact on Everyman Media (LON:EMAN) too, for any holders out there...

2 more RNSs this evening, saying Boohoo (LON:BOO) (I hold) has increased further to 12.85% of Revolution Beauty (LON:REVB)

These transactions happened on 15th & 16th August 2022.

yiannos1

Hi Paul ,

Have you got any idea what was the interest of Boohoo’s Chairman Mr. Mahmud Kamani in Revolution Beauty in the IPO , and if this should have been announced prior to these big purchases.

Revolution Beauty will need between 25%-30% of today’s market cap in the next year or so in new finance i.e. placing.
These purchases , together with the fundamentals and accounting issues , make no sense at all.

Boohoo could have got this from the administrators for nothing if they wanted to and the fall in today’s (Boohoo) share price agrees with my assumption.

chelsea

Boohoo (LON:BOO) Increase stake to 12.85%

Tortoise investor

Could you tell me which estate agent has good customer service ;) ?

At least they're cheap!

Johnnycomelately

18th Aug '22

I'm wondering if that's the plan by Boohoo to buy Revolution Beauty when it goes into administration. By having nearly 13% of Revolution Beauty shares already, does that put Boohoo as frontrunner to buy all of it when it enters administration?

FeatheredCapital

A fund manager, who still likes the stock, has been a forced seller due to redemptions in his open ended fund. It is not to do with concerns over the company's fundamentals. Unfortunately, it does not take much trading volume to have a significant impact on some of these illiquid holdings.

Very helpful thank you.

Small Cap Value Report (Wed 17 August 2022) - BOO, PURP, COG, MOON, CINE, GHH, GATC, CFX, MYSL

Agenda -

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Paul Scott

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