Small Cap Value Report (Wed 19 Jul 2017) - LRM, HOTC, EYE

19th Jul '17 by Paul Scott

30 comments 30775 reads

Good morning everyone! It's Paul here.

Many thanks to Graham for adding some extra sections to yesterday's report, as I had a busy afternoon dealing with other stuff. I think we'll work that way in future - as readers seem to prefer having all our sections in the main article. My experiment with posting additional sections in the comments area didn't seem to go down well, and I understand why - as such comments could be easily missed.

On to today's news.

Lombard Risk Management (LON:LRM)

Share price: 10.85p (down 16.5% today)
No. shares: 400.6m
Market cap: £43.5m

AGM Statement - this software company has a 31 Mar 2018 year end. It is a developer of software for banks, concerning e.g. collateral management & regulatory reporting.

There's very little information about trading in today's update. This bit is the closest it gets to being a trading update;

The Company continues to see a positive market for its products with the landscape largely unchanged since we announced our 2017 full year results in May.

That doesn't sound particularly good to me.

Also this bit is somewhat worrying;

"We have historically reported full year revenues that are weighted to the second half of the year and we expect the year to 31 March 2018 to be no different.

I think the market has taken this as a veiled H1 profit warning, which is probably sensible, given this company's poor track record.

The next bit says that they have a positive pipeline, but nothing positive is said about actual performance. That again suggests to me that things possibly aren't going particularly well:

The Board is encouraged by the pipeline of new business being pursued both through the Company's direct sales force and through its relationships with its channel partners.

Lombard Risk continues to invest in its development centre in Birmingham, which will provide the Company with both time to market and cost advantages. The Board is satisfied with the progress of this important initiative and continues to look to the future with confidence."

This company is always relentlessly confident, but that means nothing in terms of performance, which has been poor for several years now.

Note that nothing is said about performance compared with market expectations. That, combined with the H2 weighting…

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andrea34

19th Jul '17

As you ask Paul, I have tried HOTC, a couple of times... via presents to me. Now I am generally regarded as a bit of a chocoholic with a taste for the finer side of chocolate... and in my opinion I don't think they are worth the money, especially considering they are essentially a chain - for a smaller treat one is paying £1 per chocolate which I think is ridiculous. Some of the flavours are lovely but some are just a bit odd, and some chocolates are just too intense to be enjoyable. I have a place where I work (in Dublin) called Leonidas and they make scrummy hand-made Belgian chocs which are cheaper and much nicer.

Paul Scott

Hi Nick Ray,

Ah yes, you're right. Sorry, the green line is the 50-day MA, and the red line is the 200-day MA. I'll fix this error in the article now.

Serves me right for straying into charting, I was bound to get it wrong!!

Thanks for pointing out this error.

Regards, Paul.

SmallCappy

Like you I am a long term holder of CLIG. Contrast the transparency of the TU from CLIG with its real numbers and the weasel words of most TU's 'in line with management expectations'. Unless management has expressly set out what their expectations are (which they never do) this is just meaningless waffle. I think Paul has commented on this before but for me this is one of the biggest problems for investors. Quoted companies really need to up their game on transparency.

We need to ban weasel words!

CliveBorg

Stoatily agree.

Francis Dwan

Hi Paul hope you are well, just wondering if you would cover the Mi-Pay (LON:MPAY) results that are out Friday. Company should (finally) be moving into profitability, with some big clients like Tesco mobile etc. on board. Update might be of interest

ricky65

I don't know of any reason for the rise in Focusrite (LON:TUNE) today. It's been in an uptrend since the well received results in May. I think it's called positive post earnings drift.

herbie47

I read it's something to do with Intel Thunderbolt connection that may replace usb.

Carey Blunt

Are you sure you want Paul to comment? It's listed as highly speculative micro cap sucker stock with a stock rank of 10!
Do you think that this is about to deliver the jam?

bestace

That's interesting, thanks for sharing.

To me that illustrates the need to look past the headline StockRank to really understand a company's quality, which obviously has implications if using the StockRanks as part of a screening process.

I'd suggest that using metrics based on gross profit is probably misleading when the top of Lombard's income statement looks like this:

Likewise the Stockopedia algorithms are assuming a 15% long term ROCE and 8.8% margins when the direction of travel for LRM looks like this:

Paul, I use the 20, 50, 100, 150 and 200 MAs and sometimes I can get muddled between them!

I don't think Hotel Chocolat (LON:HOTC) qualifies as a Minervini stock at the moment as, being below the 50 MA, it fails to meet Minervini's Trend Template criteria. I've got a feeling he wouldn't buy it unless it broke out to an all time high on high volume.

Hi Ricky65,

I wasn't suggesting that Minervini/growth investors would necessarily buy Hotel Chocolat (LON:HOTC) now. My point was rather that they might have previously bought the stock when it was in an up-trend, and might now be selling. So that selling could become a headwind, making the stock perhaps unlikely to make new highs?

Regards, Paul.

MSR Bruce

I agree that the Hotel Chocolat product is not particularly good!

Fangorn

20th Jul '17

Hotel Chocolat is superb - their array of offerings extensive. There's also a decent Dark Chocolate option which is appealing for an ex Bournville dark eater.Wont touch the Cadbury brand anymore.

Yes they're a bit on the pricey side but not if one considers chocolate to be a treat!

Subscribe to a Quarterly box myself - and the odd Easter/Crimbo additional box.

Very satisfied.

-1

Expecting the company's maiden profit in Friday's results. Client list is A1, with names like Amazon, Paypal, Sainsburys, and Tesco. Operating losses should have been largely reduced, as company achieves more and more scale to their operations. SE Asia area of large potential growth, underpinned by solid earnings growth in Europe. However we shall see, I'm often wrong more than I am right

Sorry I meant to thumbs up but impossible to change

I note the share price is down heavily today, maybe there is some leak about results. The spread is very wide.

23rd Jul '17

I spotted a Hotel Chocolat in Glasgow today (on a flying visit). I bought 3 small packs of different chocolates - 6 squares of chocolate in each pack. Cost £9.45.

Opinion of the 3 people (incl. me) who ate them - OK, nothing special. Expensive.

The shop was very nicely presented. Overall, I wonder if this new brand might have some appeal to begin with, but might wane over time. I just don't think the product is good enough to justify such high pricing. So I won't be buying any shares, as it looks an expensive stock, for only moderate earnings growth.

Regards, Paul.

vik2001

24th Jul '17

im not tight but I wouldn't pay £10 for choclates unless I knew a lady was going to return the favour lol.
give me a cadburys wispa anytime ;)

Andrew L

27th Sep '17

Paul - I am not sure with the assessment that Hotel Chocolat's products are expensive. Price is relative to quality and the product you are buying. Hotel Chocolat has a very clear brand for "More coca, less sugar." Other chocolate makers use less expensive sugar and occasionally substitute coca butter for a less expensive alternative such as palm oil. Coca is expensive so chocolate with a higher content will cost more.

Much of the chocolate on the market is therefore low quality junk. For people who are into chocolate it matters if you are buying a bar full of cheap sugar or the product you actually want. There is a health shift away from sugar while coca is considered to be a healthy product. Consumers choose brands according to whether they trust them and Hotel Chocolat is building up a brand focused on quality.

A mistake I have made is assuming that all consumers are like me. So I may not invest in say Just Eat as I don't like takeaways. I think with Hotel Chocolat it is easy to assume that all consumers won't pay more for higher quality chocolate if you wouldn't yourself. However, some consumers will pay more for quality. Chocolate is a treat and as such price is less important than quality. Chocolate is also often bought as a present or to share with someone. When it is bought as a present or to share there is a tendency to go for higher priced and more premium brands. Try giving a date, a friend or family members a cheap box of own brand supermarket product as a present.

On the point that the appeal of the brand may fade over time. I am not sure as the trend is actually towards more authentic, quality and artisan products (premiumization and authenticity). This is where consumers are willing to spend and it is hitting sales at the global consumer staple giants. I don't think this trend will reverse.

In Edinburgh there is a Thortons and a Hotel Chocolat right next to each other. They both perform well. There is a market for both. Lastly, I am not sure of your assessment of only moderate earnings growth. What is the long-term potential for this business? Can it be a success in Europe and elsewhere? Can it be a global brand? As far as I can see Hotel Chocolat is well placed for the current global consumer trends.

From HOTC's final results highlighting why the are more expensive. Some consumers may not recognize the taste difference. It is clear that HOTC's first priority is quality rather than price. This is a strategy that tends to win in the long-term and I think consumers are increasingly becoming more discerning. It is easy to look at this as a marketing gimmick and a way of shifting high priced chocolate. However, if you try cheap, sugar filled chocolate bars they are pretty disgusting by comparison. From HOTC's recent final results:

"Consumers increasingly want uncompromisingly delicious and hedonistic chocolate that's also made with responsible amounts of sugar. Hotel Chocolat's 13-year track record of "more cocoa, less sugar" is applied to every grade of chocolate, from our whites, through milks and darks. This makes us virtually unique amongst premium chocolate brands. Flip over and read the ingredients of other milk and white brands and you will find it quite revealing! Sugar will most often be the number one ingredient even with premium pricing. In our view, if cocoa isn't the number one ingredient, it really should not be called chocolate. All our chocolate grades meet this 'cocoa first' requirement, even our whites and milks. When you consider that sugar is about 20 times cheaper than cocoa, the reason why other brands take a different route becomes clear."

Small Cap Value Report (Wed 19 Jul 2017) - LRM, HOTC, EYE

Lombard Risk Management (LON:LRM)

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Paul Scott

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