Small Cap Value Report (Wed 23 Jan 2019) - EYE, CAKE, EVE, HOTC, EMR, JOUL

Wednesday, Jan 23 2019 by
50

Good morning, it's Paul here.

Apologies, for my running late today. This report will gradually emerge throughout the afternoon.


Falling knives

Some confidence seems to be returning to the market at the moment. As alluded to in yesterday's report, this is creating some attractive buying opportunities. The general sell-off in H2 of last year seemed to take most small caps down with it, regardless of how companies are performing. In particular I'm seeing good profits being made on small caps, in 2 specific situations right now;


Potentially profitable situations

1) Shares which relentlessly drifted down last year, on low volumes of selling, for no apparent reason.

When companies like this put out a positive trading update now, there's lots of scope for share price upside, in some cases. Eagle Eye Solutions (LON:EYE) is an example of this, which I'll cover below. Also Cloudcall (LON:CALL) (in which I hold a long position) springs to mind - with a very upbeat recent CMD and positive trading update, starting to claw back some of the unjustified share price losses of H2 2018. 

2) Shares which fell heavily last year, in anticipation of poor trading, then got whacked a second time on issuing poor trading updates.

This resulted in some pretty crazy market over-reactions on the downside. Good examples of this are Superdry (LON:SDRY) and QUIZ (LON:QUIZ) (in which I have a long position) - which have both bounced about 50% from the lows on their recent profit warnings.


Therefore, I'm wondering if this might be an interesting time to look closely at (very selectively) catching some falling knives, on a profit warning?


My checklist for possible falling knife catching

1) Financially secure - so a decent balance sheet, preferably with net cash, which protects the downside.

2) Reason for the profit warning falls into the temporary, fixable problem(s) category - Zoo Digital (LON:ZOO) yesterday looked like an example of a one-off profit warning, and I note it's started rising today.

3) Share price has already fallen a lot in 2018, and has a further, deep drop on the profit warning - so an over-sold situation.

4)…

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As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested. ?>


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Eagle Eye Solutions Group plc is a software as a solution (SaaS) technology company. The Company is engaged in the marketing, validation and redemption of digital promotions in real-time for the grocery, retail and hospitality industries. The Company's software platform, Eagle Eye AIR, integrates with all existing point of sale (POS) systems and creates digital offers, rewards and vouchers then delivers them to customers by e-mail, text or through a loyalty application for instant redemption. Eagle Eye AIR enables brands and merchants to set up targeted campaigns, choosing various media channels to reach specific demographics. Eagle Eye AIR captures real-time data on consumer activity and campaign success. Eagle Eye Promote is a rules-based platform for brands and retailers, which creates, builds and manages their promotional campaigns. Eagle Eye Gift allows tracking of gift vouchers, including redemption data. Eagle Eye Reward supports and enables the digitization of loyalty schemes. more »

LSE Price
146.5p
Change
 
Mkt Cap (£m)
37.3
P/E (fwd)
n/a
Yield (fwd)
n/a

eve Sleep PLC, formerly eve Sleep Limited, is an e-commerce company. The Company is focused on direct to consumer European sleep brand which designs and sells eve-branded mattresses and other sleep products. The Company has six products, including foam mattress, topper, pillow, sheets, protector and duvet. The Company’s foam mattress made are up of three layers: a base layer of high-density foam, which provides support and durability; a middle layer of open-celled foam, which encourages air flow; and a top layer of next-generation memory foam, which moulds around pressure points and then springs back once the pressure is released. The Company's protector product is made of 100% cotton and a Neotherm membrane. The Company’s sheets product offers unbeatable comfort and sublime softness. more »

LSE Price
9.25p
Change
-2.6%
Mkt Cap (£m)
24.1
P/E (fwd)
n/a
Yield (fwd)
n/a

Hotel Chocolat Group plc is a chocolate company. The Company is engaged in manufacturing and retailing of chocolate in the United Kingdom and overseas. The Company operates in three areas: the United Kingdom, Europe and Rest of World. The Company offers chocolates under the brand, Hotel Chocolat. The Company sells its chocolate direct to customers though subscription, online and its approximately 83 stores. The Company's product ranges include self purchase, gift and occasion, rare and vintage, and other. Its product types include boxed chocolates, luxury boxed chocolates slabs and batons, enrobed fruit and nuts, chocolate hampers, ribbon bags, wine and spirits, hot chocolate and cocoa cuisine. Its chocolate types include dark, milk, white, bean to bar, boozy, caramel, cocoa gin, coffee, fruity, marzipan, mint, nut, patisserie, praline and truffles. The Company owns a cocoa plantation in Saint Lucia called the Rabot Estate. more »

LSE Price
310p
Change
 
Mkt Cap (£m)
349.8
P/E (fwd)
29.3
Yield (fwd)
0.6



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


37 Comments on this Article show/hide all

rmillaree 23rd Jan 18 of 37
14

Cloudcall (LON:CALL) - positive update

IMHO there hasn't been one :)

IMHO It's stretching it saying that the Cloudcall update was a positive update. It was an in line update and i have seen no change in forecasts to indicate that anything has been upgraded. Note this is inline only after the previous downgrades earlier in the year (there was 3 per stockopedia)- so they missed their start of year target in 2018 with things getting progressively worse.

What they said recently
The Group is pleased to confirm that revenues, cash position and losses before tax are all expected to be in-line with market expectations, subject to year-end financial close and audit procedures.

The most recent announcement had no positive news with regard to 2019 - positive would have been something along the lines of better than previously advised or expected. Their comments with regard to the current year are so generic that they are worthless and say nothing.

As we exit 2018, I still strongly believe that the investments we have made will be most impactful in 2019 and should underpin further acceleration.

 Overall, I am delighted with what the Company has achieved in 2018. As we enter 2019, we have a significantly improved product, a platform that stands ready to scale more easily, a mutually beneficial partnership programme and a growing partner eco-system. Furthermore, we have an excellent team of skilled people in place that are very excited about what the future holds.

 As a Board, we look forward to 2019 with confidence."

So if things have improved since  advised previously -  why have the company not advised this is the case to the market - surely thats what they should be doing. In the absence of anything their comments is september still apply to me as being their most recent current guidance.

Practicably speaking - it was more of a positive than a negative that there  was no further downgrades after past messups - but if this company is going places surely at some stage at some time they must release some goodness - rather than no worse than the worseness we have already told you about.

Is it a coincidence the company is hitting the publicity trail when they may be in imminent need of funds - probably not - and the one time i always think a company will have  100% glass full is when their backs are against the wall and there is no alternative - they have to keep the shareprice as high as they can to mimimise dilution if its on its way.

Ok rant over back to tax returns 

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Wimbledonsprinter 23rd Jan 19 of 37
1

In reply to post #439513

FREng

I hold Triad (LON:TRD) and have bought some more this month. Reasons for purchase: strong cash position, ridiculously low EV/ EBITDA, having been to the last AGM (when I had a handful of shares), I got an impression of the current management team. I have also read a lot of the historic baggage around this company and felt comfortabke enough to invest at the current price (there is a price for everything). On the downside, H1was weak and momentum going into H2 looked poor, the contractual nature of the buiness makes it volatile and the directors are not getting any younger and I am not clear what succession planning has been done. The Mira Makar issue is at best a significant distraction for management.

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mammyoko 23rd Jan 20 of 37
25

Re Hotel Chocolat (LON:HOTC). Anybody else see any parallels with £CAKE? Revenue, net profit & EPS charts steadily trending upwards. No LFLs in RNSs. Working capital consistently draining cashflow. Inventory increased by 300% since 2014 while revenue only increased by 70% over the same period. Virtually no FCF per share so that price to FCF is a ludicrous 495.8 on Stocko. Product appears over-priced for the quality. Opening new stores but not clear existing ones are profitable. Expensive valuation for what is, after all, a glorified Thorntons. Share price volatile and not trending in response to increasing sales and claimed profits. Harsh? Maybe.

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mmarkkj777 23rd Jan 21 of 37

Hi Paul,

Talking about falling knives Learning Technologies (LON:LTG) Learning Technology Group has fallen over 16% so far today (over 25 % over the last couple of days). I risk juggling with falling knives from time to time and I see this one as bouncing back.
Needs care to get the timing right, but seems a pretty sound company fundamentally (reported to the market late last night, never a good sign, but doesn't seem too odious).

Thoughts anyone?

I have risked a small(ish) position.

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gbjbaanb 23rd Jan 22 of 37
4

I used to work for a company called AIT, the director there misled the City and ended up getting 4 years (in a nice open prison IIRC). So its possible the directors of Patisserie Valerie will go down - after all, they're not going to be the kind of super rich party donor type of directors that always seem to get away with things.

https://www.theguardian.com/business/2005/oct/08/4

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Aislabie 23rd Jan 23 of 37
3

In reply to post #439673

Over the last two days Learning Technologies (LON:LTG) has moved down from the surprising to the extraordinary to the “somebody must know something”, a level which makes me very nervous.
The forward p/e was very high (27) but has moved into territory that is in no way alarming for a company growing this fast.
If the TU yesterday is to be believed the debt is coming down faster than forecast leaving a balance sheet that is under no strain.
The growth is largely acquisition driven but the company has made no secret of its intentions to do this and appears to be successful in these endeavours.
So it leaves us with just the feeling that there is something not good happening if only we knew what it was

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mmarkkj777 23rd Jan 24 of 37

In reply to post #439693

Hi Aislabie,

Or perhaps something has just spooked the market. Is Nigel Wray still a major share holder I wonder?

I bought about 45 mins ago, and they seem to be starting to rise again, but the big test will be the first hour after tomorrow's open.

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mrosbiston 23rd Jan 25 of 37
3

In reply to post #439668

Hotel Chocolat (LON:HOTC) has a Beneish score fail - same as Patisserie Holdings (LON:CAKE) , as you say has issues with receivables and asset quality.

The lack of cash would also be a concern for me

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Laughton 23rd Jan 26 of 37
4

Patisserie Holdings (LON:CAKE) - Very sad to see that the original Patisserie Valerie in Old Compton Street is one of the first to go. Shutters came down today apparently.

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danielbird193 23rd Jan 27 of 37
3

In reply to post #439603

Reading through Paul's checklist for "falling knife" purchases, I think IG Group (LON:IGG) would get a tick in every box. I note it climbed 6% today so the bears weren't in charge for long. Very much on my watchlist.

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gez 23rd Jan 28 of 37

re Patisserie
aimprospector twitter suggest very low interest received on cash vs other companies
https://t.co/gVn5suAIuS

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doug2500 23rd Jan 29 of 37
6

In reply to post #439603

I'd also value Graham's thoughts on IG Group (LON:IGG) when he's back.

The sell off seemed harsh when all the problems were flagged up well in advance. It was much as I expected but it was quite a lengthy update and I worry I might have missed something.

Edited to say I've just noticed the new CEO has splashed out buying nearly £100K in shares. I view this as moderately positive. Enough it's not a token gesture, but no more than I'd expect a senior office holder to do.

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jules2k6 23rd Jan 30 of 37
5

In reply to post #439568

They won't cover this here. But my two penneth as an employee, says they are a good company and are up to date and going places.

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hayashi22 23rd Jan 31 of 37

In reply to post #439738

That is a very telling figure.

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runthejoules 23rd Jan 32 of 37
6

That truly was an all-day breakfast :-)

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xcity 23rd Jan 33 of 37
2

eve Sleep (LON:EVE) I don't hold and have no intention of holding, but I can see an argument for putting money into the placing. New chief exec, presumably brought in to turn things round. He has a more successful hands-on CV. The UK losses were reasonable for a new business. Have to assume they have reason to see more potential in France. Expanding product range (he has experience of that with Moonpig, so might know what he is doing) to increase repeat purchases which were already at 12% iirc. The amount of extra money is small relative to the existing investment. Everything comes down to execution. I'm not sure I'd do it, but I have no insight into the figures or the business and have no idea how impressive the new chief executive is. What is clear is that he needs the placing money to have any chance at all.

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Gromley 23rd Jan 34 of 37
3

In reply to post #439703

When did Patisserie Holdings (LON:CAKE) have an M- Score fail?

It certainly didn't in October (the last available stockreport)

I do not really understand the wish to draw parallels or learn lessons from Patisserie Holdings (LON:CAKE); given that at this stage nobody has produced any convincing evidence that the fraud was detectable.

No position in Hotel Chocolat (LON:HOTC) nor (thankfully) Patisserie Holdings (LON:CAKE)




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Gromley 23rd Jan 35 of 37
3

In reply to post #439738

re Patisserie aimprospector twitter suggest very low interest received on cash vs other companies https://t.co/gVn5suAIuS

I think we need to be careful with all of these "wise after the event" claims.

aimprospectors  observation is that :

Mulberry earned £96k interest on a year end cash balance of £25.1m (YE Mar-18)

Volvere earned £29k interest on a YE 'cash' balance of  £20.4m (YE Jun-18)

But

PatVal earned only £1k on a YE net cash balance of £28.8m (Half year Mar-18)

I have not checked the figures but I will assume they are correct (albeit not like for like). However, what is the inference from these numbers?

I can only think of 2 :

1. That the claimed cash balances were not real.

Highly unlikely IMHO - verification of cash balances is a very easy catch for auditors.

or

2. That there was negative interest coming from some 'un-disclosed' debts that reduced the net interest figure.

Again it seems pretty unlikely that an out-payment of interest which did not have any debt associated with it could get past the auditors.

I know that we all clearly want to see if there are any lessons to be learned from Patisserie Holdings (LON:CAKE) , but I think we'll need to exercise a degree (and probably a masters!) of patience, half cocked theories (based on dodgy 'backtesting' won't get us anywhere.)

People can draw there own conclusions, but really the ONLY message I am getting is the reinforcement of the importance of diversification. If Patisserie Holdings (LON:CAKE) was one of 20 or 0, the damage will  have been limited, but if it was one of 3 or 5 and forensic due diligence failed to save you then the wounds will be more severe.





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mrosbiston 24th Jan 36 of 37
3

In reply to post #439823

sorry - should have pointed out this was through 2016 and 2017 (the M Score fail)

i do agree with you that ultimately this would not have been enough of a red flag for me - i agree that the flags were almost non-existent. We have all invested in 'to-good-to-be-true' businesses, there will be instances where this is correct and other examples where there is a genuinely well run and profitable business.

it was a clever fraud and a shock to the industry. if there are lessons to be learnt it is for the auditors - i don't believe an investor should change their approach based on Patisserie Holdings (LON:CAKE), because potentially you could miss out on decent opportunities - that are genuine.

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FREng 24th Jan 37 of 37

In reply to post #439658

many thanks.

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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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