Small Cap Value Report (Wed 23 Oct 2019) - SPD/GOAL, SCT, 7DIG, NEXS

23rd Oct '19 by Graham Neary

24 comments 6493 reads

Good morning!

Today I'm looking at:

Sports Direct International (LON:SPD) / Goals Soccer Centres (LON:GOAL)
Softcat (LON:SCT)
7digital (LON:£7DIG)
Nexus Infrastructure (LON:NEXS)

Sports Direct (LON:SPD)

Share price: 317p (-1%)
No. of shares: 522 million
Market cap: £1,654 million

Statement re Goals Soccer Centre plc

Mike Ashley's thoughts on the fiasco at Goals Soccer Centres (LON:GOAL) do make for a dramatic RNS.

Goals Soccer Centres is just one of the many poor-quality businesses which Sports Direct has invested in. Goals admitted this year that its accounts were full of errors and that it was "in discussions with HMRC regarding a potential misdeclaration of VAT".

Sports Direct says today that the management at Goals didn't properly engage with them, when they were considering a bid for the entire company.

They go on to make some rather strong statements about what happened. I think it's worth pasting this in full:

"Given the issues within the Goals business, Sports Direct believes that it would be convenient for those concerned if Goals, and its corporate history, disappeared as a result of the AMA process.

[GN Note: AMA stands for "accelerated mergers and acquisitions" and refers to the attempt by the management of Goals to sell the company.]

From the beginning, the attitude of the Goals board made no sense, including proclamations to senior management of Sports Direct that the issues impacting on, and leading to the catastrophic failure of, the business had only been perpetuated by one person.

Sports Direct considers the Goals board members it was dealing with to be intelligent, and anyone with any common sense could tell it could not be only the result of one person's behaviour given the relative size and timeframe over which what would appear to be considerably more than "inappropriate actions" took place. This leads Sports Direct to conclude that the behaviour of the Goals board, and its apparent failure to spot and deal with the issues, amounts to incredible incompetence and ignorance, wilful or otherwise, at the very least and potentially far worse.

Sports Direct continues to believe that all relevant matters should be fully…

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Mark Tughan

23rd Oct '19

Hi All,

Seconding Nexus Infrastructure (LON:NEXS) . SR 89, PEG of 0.3, "contrarian" and passes 2 screens, one of which is Greenblatt's magic formula (quality+value) and the other is Ken Fisher price to sales (value, looking for growth). I hold and topped up a few weeks ago.

john652

Re Softcat (LON:SCT) in addition to a rather excellent name, they go on about customer service and staff a great deal, as do most companies but this from the CEO review, at the start of the final results, is quite something. These aren’t small awards. The CEO review is very well written & the results look very good to me.

Graham, would you have a look, or too big?

“Partner and industry recognition

We also saw strong growth in all our key vendors and received recognition for our performance from partners and other external parties. Dell awarded Softcat "Transformation Partner of the Year" across EMEA, and Sophos, Mimecast, VMware, Varonis, Ivanti and AlienVault all rated us their "Partner of the Year". We won the coveted "CRN Reseller of the Year" award, and were named "Best Performing Company for Infrastructure Services" and "EMEA Growth Partner" of the Year by Megabuyte and Canalys, respectively. We were also awarded "Company of the Year" at the PLC awards. Perhaps most pleasingly, CRN recognised a number of outstanding contributions from Softcat people in their inaugural Women in the Channel awards.”

iwright7

John, The other Softcat (LON:SCT) phase that me struck today, which bears out their recent awards and would indicate a quite unusual sales strategy:

...Each year we develop greater customer intimacy and extend and deepen our technical know-how.

I can't see any of the FT100 companies risking putting this statement in their annual report!

Graham Neary

re: Softcat (LON:SCT)

I'm intrigued by the number of requests for this £1.9 billion mkt cap company. Let's see what I can do.

whitmad

I was looking at SCT yesterday as it matches most of my criteria, but I was put off by the considerable volume of selling by several directors over the last year.

rmillaree

Softcat (LON:SCT)
Had a very quick look at this - as with other companies of this ilk i am always magnetically drawn to the trade and other receivables line as a starter for 10.
Sales for year £992 mill (prev year 797 mill)
Trade and other receivables £285 mill (prev year 206 mill)
Lets also make note of the payables line "deferred income" £15 mill - prev year 11 mill -(the higher tihs figure the better)
So sales up 24% and receivables up 38% - mini red flag based on the numbers.

there is a slightly confusing (on an initial quick look) note about "grossed invoice income" - a measure they like and a much higher total.

After my quick glance all i can presume from this is that it appears based on the above quoted numbers that the receivables total is not only high but increasing as a % faster than sales (not uncommon for fast growing stocks)
Note the increase in receivables in matched by increase in payables so the cash flow looks fine - if there is issues revenue recognition wise that tends to be where the problems get parked in the trade payables column.

Having said that the company quotes cash conversion of 92% which sounds reasonable.

Note the good news is that the amount of unbilled receivables and accrued/deferred costs bit is very modest - so i am guessing its a symptom of their customers get 60-90 days credit after they have been billed.

Does anyone else have any opinion on this relatively high receivables figure which i would normally see as a red flag,perhaps its just a symptom of standard payments terms in that industry - basically blue chip companies can presumably choose their own payments terms and no software company is really going to turn down the work.

I guess the only other interesting tidbit is the 2020 eps growth is only 5% - is this the future is is this a one off? for the pe we have i would like to thing growth was above 5% pa.

Bonitabeach

Graham,

Matters have reached a new low when Mike Ashley is berating others on corporate governance, VAT compliance and directors responsibilities.

He must have an incredibly short attention span: Belgian £605M VAT tax claim.

The auditors, Grant Thornton, have subsequently not sought re-appointment, no other firm of substance seems willing to fill the gap and the Chief Finance Officer has been sacked.

Irobot plc - nasdaq listed irbt ($irbt)

This company looks like a potentially interesting play (is it really 80 years since the original short stories that made the book turned up strewth im getting old)
Nasdaq listed - shares peaked at over $125 dollars not so long ago - and after yesterdays they may open around the $40-$45 dollar mark. i don't have access to overseas stocky number but looks like rthey may be on target for $3 dollars eps putting the pe at around 15 ish.
They are experiencing tariff issues hence the downer in shareprice - but other than that this does seem a decent growth company in a reasonably niche area. Ok i guess in 10 years we will all have a robot vacuum but i am guessing that they have enough technical nouse to make them something of an american dyson?? - the original members having come from MIT.
So without having done too much detailed research i am tempted to have a punt on these dimply due to the shareprice being somewhere in the doldrums - not an expert but it seems that most of these us tech companies that are still fundamentally growing seem to bounce back quickly when the share price takes a knock.
Anyone any thought on this random outfit?

re: SPD

Bonitabeach, thanks for reminding me of that - couldn't make it up!

Graham

Philip Wigg

"Maybe we can turn this into a game. Are there any companies which have used the phrase "as-a-Service" outside of a software context which have turned out positively for investors?"

I can tell you it doesn't always work out inside a software context either.

sharw

Graham - thanks for looking at Softcat (LON:SCT) . What impresses me about this company is that it has been buit up organically - many others would have increased by buying up competitors and ended with a balance sheet full of intangibles. Keith Ashworth-Lord says " ... it has been eating its competitors' lunches". He has been building up a stake for the Buffettology fund and his full comments on this company can be found here:

https://www.castlefield.com/media/2713/cfp-sdl-uk-buffettology-october-2019.pdf

ppdrs

Although past performance is no guide to the future, this company has been a class act for some time, having posted something like 40+ quarters of uninterrupted earnings growth. So whilst it has a racy valuation, I think many are backing a quality management team - I've topped up today on the SP drop today.

WDWombat

from the company Q3 release

We now expect 2019 revenue between $1.2 to $1.21 billion on 10% to 11% growth, with an operating income between $75 million and $80 million, and EPS in the range of $2.60 to $2.80..... Although our third-quarter results were strong, sell-through following our late
July price increases was suboptimal. Given this outcome and our belief that the RVC category was at a growth inflection point prior to tariffs, we elected to roll back our pricing to pre-tariff levels on most of our products.

So they have basically dropped US prices back down. For the record there is also a suit they are bringing against a competitor (Shark) for patent infringement. Q3 apparently beat estimates and the guidance here is broadly in line with (what I think is) prior consensus, albeit at the bottom of the range. The p/e for 2019 is around x20. The company had been growing quickly but this seems to be a pretty hefty drop in OP from $106m in 2018. Latest numbers I can see had net cash of $165m, no debt. The average target price prior to the earnings release and comments therein was $70.

I have absolutely no view on the business but as you say has dropped severely since the Spring.

Gromley

Softcat (LON:SCT)

Does anyone else have any opinion on this relatively high receivables figure which i would normally see as a red flag,perhaps its just a symptom of standard payments terms in that industry - basically blue chip companies can presumably choose their own payments terms and no software company is really going to turn down the work.

Yes.

Firstly - I don't think the timescales seem excessively long (Graham calculates 82 days) - especially as milestone payments may become due during the course of a contract and therefore recognised as revenue, whether or not they are billed and paid at the time.

Probably more importantly though, I think it is important to consider the "grossed invoice income" rather than the revenue.

My understanding of how they describe this is that say they work on a customer contract for £15k but £5k of that is for (say) sisco kit for which Softcat place the order but create a contract between the customer and Cisco. That is not revenue but it is in the gross invoice income and therefore in the receivables as Softcat will collect the cash and pass it onto Cisco.

My understanding was that the key determinant was who carried the payment risk (if the customer defaults) - if Softcat carried that risk then it would be revenue, if it were Cisco then it would not be considered as Softcat revenue. Things may have changed however as they say :

"IFRS 15 requires some finely balanced judgements be made to determine whether Softcat acts as principal or agent in certain trading transactions."

If we look at receivables compared with the Gross Income using Graham's calculation this comes down to 58 days, which doesn't ring any alarm bells whatsoever for me personally.

[No position currently, but potentially interested now]

Yes, "interesting" thoughts from Mr Ashley.

On the subject of Goal's failure to "properly engage", I would have to observe that Mr Ashley does not always come across as particularly engaging.

Debenhams , also did not properly engage with him; but if I recall correctly he had already indicated that he might/would block any sale of Magasin du Nord, which could potentially have produced a sufficient cash pot to enable them to trade through their downsizing,

If Mr Ashley tried to "properly engage" with me, I might pretend to be out.

Irobot (nasdaq $irbt)

thanks for that WDWombat - with regard to the large drop in operating profit this year compared to last - i think that's pretty much exclusively down to trump increasing import tariff's up to a 25% level.

The company had previously quantified the specific tariff related hit for this year.
"CFO Allison Dean now puts the price tag of the increased tariffs for 2019 in a range of $35 million to $40 million".
Ok these tariff's costs are a real lost profit medium short/term but longterm i would expect the company to be able to minimise the hit by planning as appropriate - perhaps simply waiting till trump is impeached or puts his dummy back in and the hit will be back to a more manageable level.

I guess the main question is can they successfully branch from their core sales to other similar products like the new robotic lawnmower they have ? - i guess you might have to watch that one a bit more closely than your roomba if you have a boat load of flowers in the garden.

Graham,

Thanks for the Softcat (LON:SCT) analysis and I liked your possible software IT "one stop shop", observation. I suspect another Moat is their stated desire for customer intimacy and thus to love dealing with them. Would be interested to hear from anyone out there doing business with them?

24th Oct '19

Good analysis Gromley & rmillarie on Softcat (LON:SCT)

In addition to their customer & service focus they have, and I am am sure this is in a report I’ve read/heard the CEO state, a detailed, thorough corporate strategy created over many years and communicated to all, and I quote ‘sell more stuff, get more customers, and sell them more stuff’. Another possible reason to hold.

re: SCT

You're welcome.

"Intimacy" - that is certainly an unusual phrase for a PLC to use! There seems to be something to it.

G

laurie

Nexus Infrastructure (LON:NEXS)
This link to invoice payment statistics may help in assessing the financial position of companies in the construction sector. While conceding that many factors can affect the timely payment of invoices, £NEXS (Tamdown) and Van Elle Holdings (LON:VANL) statistics look unhealthy.
https://builduk.org/priorities/improving-business-performance/duty-to-report/table/

Small Cap Value Report (Wed 23 Oct 2019) - SPD/GOAL, SCT, 7DIG, NEXS

Sports Direct (LON:SPD)

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Graham Neary

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