Small Cap Value Report (Wed 19 Jan 2022) - MORE, ACRL, BOTB, MIDW, SIS, PCIP, APP, ITS, EVE

19th Jan '22 by Paul Scott

54 comments 10561 reads

Good morning, it's Paul & Jack here, in what is turning out to be a very busy week! Today's report is now finished

Agenda -

Paul's Section:

Accrol Group (LON:ACRL) - I review interim results. Poor balance sheet presentation makes it look highly geared, but it isn't once you strip out lease liabilities, confusingly shown as "borrowings". As mentioned last week, when it warned on profits, EBITDA does not translate into much profit, and the business model seems fundamentally flawed to me.

Hostmore (LON:MORE) (I hold) - I interviewed the CEO & CFO here - audio, 25 minutes - hopefully this is a good introduction to the company, and I challenge them on product quality & customer reviews. (no section below)

Best Of The Best (LON:BOTB) - H1 figures look solid, in line with expectations. But the H2 outlook is poor, with the big problem being increased marketing costs again. That results in fewer new players, and reduced profits. I'm braced for another share price fall today, which looks inevitable.

Pci- Pal (LON:PCIP) - a positive trading update. Very impressive growth in high margin, recurring, sticky revenues. Patent infringement legal case against the company is the fly in the ointment though.

Christie (LON:CTG) - a strong trading update, but difficult to quantify with no specific figures, and no broker research available. Looks to be family controlled. I have a stab at valuation, which looks reasonable, and it looks like market conditions for its niche might remain positive in 2022. Difficult to see much upside though.

In Style (LON:ITS) - an in line Xmas trading update, in terms of revenues. However, supply chain problems result in profit falling below expectations, so broker estimates are reduced today. It's a small player in a very crowded space, but so far is holding its own. Not something I would want to own though.

Eve Sleep (LON:EVE) - still loss-making. Still has cash, but it's almost halved in the last year. I suspect the chances of commercial success look slim now, and am stopping coverage now, unless something positive happens.

Jack's Section:

Midwich (LON:MIDW) - another profit upgrade from this audiovisual reseller, which has rebounded encouragingly from Covid disruption and is now reporting record levels of revenue and profits.…

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Zipmanpeter

19th Jan '22

Re Appreciate (LON:APP) - I hold a small position and am also optimistic about a good recovery in 2022.

In my view, the evidence for recovery is there in this latest trading update. All year Billings are up +8% vs 2years ago, Q3 is up +13% and Dec +41%. Billings translate to rev and profit with a delay and the mix is shifting to better margin digital.

The need in 2022 to work hard to retain good (low paid) staff’s loyalty whilst trying to avoid wage rises plays into their 'employee of the month' and non-cash bonus style rewards schemes. These are the core of Appreciate’s business now. (Hampers are gone and I think the Christmas savings product might follow).

Love2Shop is the leading flexible multi-redemption brand in this space (all brands except single store own brand offers are weak as you are given the reward, not buy it).

Restructuring was well underway before Covid but accelerated by it so now more is in higher margin digital (and card) based products with much less in paper. Businesses that make the leap from analogue to digital well, do very well in my view but having all 3 formats (Digital/card/paper) helps them make the jump with lower risk.

As Covid fears subside, I think we will see a resurgence in physical retail as defined broadly ie including experiential and hospitality, not just acquiring physical product) and smaller businesses, the currently weak part of the mix will start to offer redeemable rewards again as they try to rebuild. The bigger players already are.

With no share dilution, we only need Pre-Covid profit to return to $12Mn for EPS to boom. Financially, we should get good divis (>6% yield) whilst we wait for valuations to recover although talk of a tailward from rising interest rates is overblown as i) interest rates are not going to go that high and ii) so much more of the business is digital

Obviously, the yield reflects risk (further lockdowns, potential LT move away from reward schemes) but risk /reward now looks good to me.

Paul Scott

That's me done for today! We covered nearly all the beats, and warnings, only missing Centaur Media (LON:CAU) beat, but I'm too tired to do any more now, sorry about that.

I've changed the colour-coding, which is now traffic lights:

Green = above expectations
Orange = in line
Red = profit warning

The wording says which they are, so no problem for colour-challenged people :-)

Tommy H

Hi Patrick

I have been in that quandary for a while with City Of London Investment (LON:CLIG) I hold only in one of the families investments (makes it sound a lot lot grander than it actually is) which is mum's ISA (aka pension) as an income part of that. So with an average buy of £4.20 back in 2020 yes I should have sold at £5.50+ and bought back in somewhere lower but that is rear view mirror world and I am not a good trader.

I continue to hold because of the income which is paid out for mum to live on, so whilst there is a worry about the longer term structural trends in the funds, given the overall negative market since September/November I feel the cautious approach is ok for now and continue to hold, though obviously selling is quick enough as it is log on and click the button. I think that if it goes down through £5 and keeps heading lower that will probably happen.

So whilst this has met the sell if falls >10% from peak (depending on the spread and pricing obviously) but also has partly what are you going to replace it with if you do sell, considering mum is about 20% cash right now? Though I would note that I look on yield against current price not bought price when doing that part of the monthly review.

I would note that I have sold out on Polar Capital Holdings (LON:POLR) and Premier Miton (LON:PMI) for similar reasons to protect capital with the falling share price, I like both companies but why fight the market when you have a smaller holding and trading costs are <1% for a buy and sell transaction. Mum is still 1% down from January 2020 in terms of capital value, some of that is obviously my mistakes and I put my hand up for those, hence the cautious approach.

Sorry no total conclusion, I continue to hold. Like the income, but then this is an income hold and I am fortunate to sit on a reasonable capital buffer having bought in summer 2020, but watching if there is a tail down like say Polar Capital Holdings (LON:POLR) or Premier Miton (LON:PMI)

Tommy

BnB

re Pci- Pal (LON:PCIP) - I too sold out when it became clear that the patent dispute would be a lengthy overhang and the very tight liquidity only added to the risk, with a painful drift resulting. My take is that, litigation aside, the fundamentals are excellent. This share is very cheap on p/s basis. But I took the opportunity to roll my investment in the name into high growth US tech names that had been even more badly beaten up. Much more expensive valuation but I'm a long term investor and it strikes me that I'd rather have my money in a very liquid name whose products are part of the fabric of every Fortune 500 company than in an illiquid small cap whose product provides a fix in what I foresee will eventually become a redundant process as new technologies replace agent card transactions via phone call.

Medium term, I expect to lose out, as I see this as a great trade for those who can see past the litigation - good profits should come to investors well before the growth curve turns down . But I'm asking myself "which company do I want to own?" rather than "which share makes me money this year or next?"

Good luck to holders. My hunch is that all will be well in due course.

psin

Paul,

re your traffic light system. Great idea - except for us colour deficient blokes.

Red, green and orange? Have mercy.

How about Yellow, Red & Blue? Or any contrasting prime colours?

Food for thought. For some.

MichaelFBS

Hi Paul

A bit of piste here but you have been in this game a lot longer than me (most of us here?) and was wondering whether you feel that with the increased ease and reduced cost of trading and the “democratisation” of investing you feel that the volatility (the severity of the price of a stock being marked up or down on positive/negative news) has increased over the passed few years?

I have only been investing properly since 2012/13 but feel this volatility has got worse since then.

Thank you.

Regards

Michael

Boon

I'm not Paul but my two cents:

- Investing is a competitive game. If all the other players are better than you at pricing accurately and forecasting the future prospects, then you'll probably be the loser.

- If there is alot of "dumb" / "passive" money flowing in, I see that as great news. It means that for the great companies I hold shares, the SP can really rocket to massive highs, for me to profit from. Best Of The Best (LON:BOTB) could be one example that is relevant today. But also look at Thg (LON:THG) for a recent example, and maybe like Ocado (LON:OCDO) and Boohoo (LON:BOO) . Many investors went in for the story in the past 1-2 years, elevating the SP to unrealistic highs (in hindsight)

- This does mean that it is harder to find undervalued companies, as if there's lots of money sloshing around looking for shares to be invested in, it will lift all share prices across the board

- While volatility doesn't matter to me as a long-ish term holder, it is highly beneficial to those that do short term trading. If that's your strategy, you should love the increased trading volumes over the last few years. More liquidity, more volatility = more opportunity for short term trading.

sevenccc

For AIM listings reporting October year end in January seems quite reasonable. Many are advised to avoid the immediate Christmas period - pre and post - as none of the professionals looking.

AIM calendar year ends tend to report late March, early April depending on the timing of Easter - and of course the quality of their results! Auditors are also impacted to varying degrees by Covid and the Omicron outbreak may have impacted some of the second tier more.

It's those leaving it til the full 6 months are nearly up that worry me...

Interesting announcement by Revolution Bars (LON:RBG) this afternoon. To issue a trading update for H1, tomorrow. Usually companies give a bit of notice, if they do, when the updates are coming.

They could have easily not announced and just issued a TU tomorrow morning. So why do the announcement, and with only a day's notice? Seems all a bit rushed.

Also this announcement itself seemed rushed, coming out just after 12pm instead of the usual 7am start of the day.

Hey Massimo

I read the £NAHL update a little differently. £40m t/o where Stocko feed suggests it was going to be over £60m, unlikely to be any net profit though close to breakeven whereas Stocko forecast had £6m+. On this basis a significant miss on earnings.

Are you working to a different set of expectations? I had scanned the Stocko figures previously and was looking for confirmation of progress in the TU today. Looks like at least 12 months behind expectations on this basis.

Hope that whoever is feeding through to Stocko is providing better forecasts on other shares. Can forgive covid screwing up some forecasts but this is a substantial and significant gap.

Hi psin,

You didn't read what I said!

We actually write the word "ahead", so you don't need to know what colour it is, to know it's ahead! :-)

Regards, Paul.

wolfspirit

Product testing the night before?

Bully15

Massimo - agreed, was reassuring to see the key indicators of a successful turnaround in the NAL business all moving in the right direction, namely % of total claims now being processed in NAL up substantially (will be interesting to see how much that can be ramped up this year towards their target of 50% of all cases). As well an upswing in H2 of close to 30% in the number of enquiries the company had received vs H1.

intuitive6191

I would have thought that the additional concern for the small investor might be the prospect of the company being taken private. Management appear to hold /control about 50% of the company and the private option would offer an exit route for the larger independent shareholders.

The statement a little strange to my eye as it is says that marketing costs for Nov and Dec 2021 increased by 37% yet there was reduced customer acquisition in the same two months. It then goes on to say that it has a large and loyal customer base which to my mind conflicts with the above.

Effectively the company is paying more (a lot more) to acquire fewer customers. This is the marketing equivalent of trying to fill a bucket with a hole in the bottom and such a reversal from what was apparently successful marketing business should be more clearly explained in the announcement.

Disclosure – never held,

RupertEvans12

There aren't any brokers covering Nahl (LON:NAH) so not sure where those expectations come from...

Effortless Cool

Peel Hunt cover them, according to the NAHL website.

https://www.nahlgroupplc.co.uk...

xerxes

Just to add my thanks to Paul for the informative interview with Hostmore (LON:MORE) which provides support for the view that the shares look promising - to the extent that I will increase my (small) holding. I thought Robert Cook (CEO) was suitably responsive to your consumer feedback on your Bournemouth mystery shopping!

chris2021

Reading the Times obituary of Lord Sainsbury, whose statement ‘retail is detail’ remains highly relevant. Would like to think that Executives regularly sample their companies’ customer service. Nothing like the awareness (fear) of an Executive dropping by unexpectedly to keep managers on track.

I take a different view on Best Of The Best (LON:BOTB) - that it is a decent business model, one that had a huge success during COVID, and over the next two years will still have a decent profit margin, cashflow positive, NTAV positive.

The only problem was the share price, and investors' expectations on future levels of growth and profits.

Having said that, I do think management aren't the sharpest tools in the shed. Understandable, since they were the legacy management from when the company was smaller, and also when it wasn't a 100% online business.

Its clear that marketing is the key function of a business such as this. They seem to do almost all marketing in-house (have not seen mention of agencies). So surely they should have a good calibre marketing team?

The only two notable "senior" profiles I could find on LinkedIn is the Marketing Director - Ben Hughes. Been there since 2010, and before that only had marketing experience at News of the World. Hardly relevant. Maybe good at offline marketing at airports, pre-online-BOTB era.

And then there is the Head of Acquisition, Vikki Adair-Wright. Who would be the one with the responsibility of running the FB campaigns, the customer acquisition marketing programme. But she joined the business in 2014 (pre-online), and before that was doing small time marketing for her own eBay/Amazon store, and also as a lowly marketing executive at Emma Bridgewater.

If I was the board of BOTB, I would offer both Ben and Vikki a golden parachute to leave quietly, and hire a strong external CMO and Head of Acquisition, ideally from the gaming or gambling industry. People who really know how to build a best-in-class digital marketing machine.

Sadly, I did a search and couldn't find any open job specs out there. That would have given me confidence that they're getting their marketing house in order; as such as I have to still sit on the sidelines here and watch this burning house for a bit longer.

gmtrader

20th Jan '22

hi Paul. Regarding Best Of The Best (LON:BOTB) increased online costs, I do recall when I spoke to the CFO of Marks Electrical (LON:MRK) him saying online advertising costs had risen substantially. So may be this is something to be concerned about for all online businesses.

Small Cap Value Report (Wed 19 Jan 2022) - MORE, ACRL, BOTB, MIDW, SIS, PCIP, APP, ITS, EVE

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Paul Scott

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