Small Cap Value Report (Wed 24 April 2019) - Mello 2019, ABDP, BOO, TAP, LGRS, FDEV

Wednesday, Apr 24 2019 by

Good morning! 

These are on my radar today.

Mello 2019 

A quick plug for this event, where I'm sure many of us will meet again, and some of us will meet for the first time.

Some recent additions to the list of companies appearing at this event:

... along with other favourites such as Sosandar (LON:SOS), Duke Royalty (LON:DUKE) (where I have a long position), Zoo Digital (LON:ZOO), Beeks Financial Cloud (LON:BKS), Scientific Digital Imaging (LON:SDI), etc. Click here for the company list.

The speaker list isn't bad either!

I've been informed that there are 50% discounts available with the code EB50.

Ab Dynamics (LON:ABDP)

  • Share price: £20.55 (+7.6%)
  • No. of shares: 20 million
  • Market cap: £405 million

Half-year Report

Some remarkable H1 growth figures from this company, which provides "advanced automotive test and measurement equipment", focusing on safety and autonomy features.

It has boosted its manufacturing capacity over the past year or so, enabling a tremendous increase in revenues. Operational leverage means that profits are turbo-charged:

  • Revenues +69% to £25.8 million
  • adj. PBT +95% to £6.4 million

Despite this strong growth, the interim dividend increases by just 10%. The company has been pretty clear about its desire to invest to take advantage of the opportunities it enjoys at present, so I guess this is not a big surprise.

Indeed, the company says today that the adjusted operating margin in H2 2019 will be similar to the FY 2018 result, due to "planned investments in resources, overseas facilities and infrastructure". It has new facilities…

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All my own views. I am not regulated by the FSA. No advice.

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AB Dynamics plc is a holding company, which is engaged in the provision of testing systems to the global motor industry. The Company is a designer, manufacturer and provider of testing and measurement products for vehicle suspension, brakes and steering to the global automotive research and development sector. Its geographical segments include the United Kingdom, Rest of the European Union, North America and Rest of the World. It designs and manufactures specialized testing systems to produce equipment for its customers to develop suspension, brake, chassis and steering systems; evaluate vehicle dynamics and safety systems on the track; employ driver in loop simulation for prototyping; develop and evaluate the next generation of safety systems in vehicles; test and evaluate the technology for use in future driverless cars/autonomous vehicles, and carry out end-of-line noise/vibration (NVH) testing of power train assemblies. more »

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Boohoo Group PLC, formerly plc, is an online fashion retail group. The Company is based in the United Kingdom and has a presence in the United Kingdom, the United States, Europe and Australia, selling products to almost every country in the world. The Company owns the boohoo, boohooMAN, PrettyLittleThing, Nasty Gal, MissPap and Karen Millen and Coast brands. These brands design, source, market and sell clothing, shoes, accessories and beauty products targeted at 16-30 year old consumers in the United Kingdom and internationally. more »

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Taptica International Ltd offers data-focused marketing solutions that drive execution and brand insight in mobile, leveraging video, native, and display to reach the users for every application, service, and brand. The Company’s technology is based on artificial intelligence and machine learning at big data scale. The Company works with more than 450 advertisers, including Amazon, Disney, Facebook, Twitter, OpenTable, Expedia, and Zynga, and more than 50,000 supply and publishing partners worldwide. more »

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

39 Comments on this Article show/hide all

Velse 24th Apr 20 of 39

In reply to post #471361

Re Frontier Developments (LON:FDEV)

It's a nice enough trailer but I wouldn't expect it to transform earnings. I expect it will sell 'fine', though it might be a bit soon after their Jurassic Park game (the fundamental gameplay is going to be pretty similar). Maybe it's been cheap and quick to make as it may share a lot of the same code? I'd also point to the lack of success of other zoo management games in the past (e.g. Zoo Tycoon). Regarding the graphics, note the text at the bottom of the video 'pre rendered footage' - the game is unlikely to look like this while you're actually playing it. I work in the games industry, and 'pre-rendered' usually involves taking the most high fidelity versions of our art assets and making a film with them, at a cost of seconds/minutes/hours per frame, as opposed to the 16.6/33ms you need to do it in to make a game.

Wish you all the best, but this one doesn't excite me. Happy to be proven wrong though.

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bestace 24th Apr 21 of 39

In reply to post #471381

There were other ways of incentivising the PLT sellers which didn't involve giving away a third of the fastest growing brand in exchange for peanuts. In hindsight (and perhaps even at the time), that arrangement represented a colossal destruction of value for shareholders, which sticks in the craw somewhat given the 'related party' nature of that transaction.

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Graham Neary 24th Apr 22 of 39

In reply to post #471346

Hi IG, I agree - the trailer looks very attractive! (this is not a comment on the game's chances of commercial success or the valuation of FDEV - I subjectively enjoyed the trailer, that's all!!)

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jonesj 24th Apr 23 of 39

In reply to post #471381

Graham has done a quite rational analysis in calculating how much of the Boohoo (LON:BOO) growth is attributable to share holders, after stripping out the PLT minority interests.
Then it's a simple case of figuring out if the valuation is reasonable when considering the growth in shareholder EPS. Whilst the growth story looks very solid, I would also suggest the PEG is rather high once we strip out minority interests. So I wouldn't pay up this much for the growth.

Incidentally, I have also noticed PLT advertising much more than Boohoo advertising. (Charlie Munger would call it the power of incentives)

Also, from the webcast this morning, it seems a lot of the growth potential is overseas and the distribution costs are increasing as a result of this. One would think there could be some hard Brexit risk in there too, for EU sales.

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mojomogoz 24th Apr 24 of 39

Taptica International (LON:TAP)

For my sins I bought this at the current price a few months ago before the RhythmOne acquisition announced - yes there's stink but it seemed to me that there are real assets and capabilities. RhythmOne acquisition muddied water as its messy and less clearly productive assets. However, Taptica have a good record at acquiring assets and making them work hard and well.

My impression of the this acquisition process is that institutional investors saw value in Taptica and then viewed the acquisition favourably. Everyone with a decent position will understand that there will be a non cash earning write down coming from Taptica cleaning up some of RhythmOne's intangibles and goodwill.

Its all very disconcerting and visibility is low.

However, the news re placing clarifies why the price has been quite weak and assuming that pricing was active and meaningful today for the book being run by FinnCap (?) looks like 11% price fall is a decent win and there is demand for the stock (as was my perception).

The "insiders" selling are really now "outsiders" and in the case of the old CEO he has a need for money due to court judgement.

All squeaky bum time but as the mist clears I think there is somewhere from a bit to a lot of value here. New CEO seems good.

Boohoo (LON:BOO)

Great company. Very highly valued. A few points:

1) Very large pick up in accruals. Explained on call as relating to stock, new distribution relationships/terms and something else I've forgotten. But the move is £40m to £80m. This is meaningfully bigger than the rise in profit. Room for jiggery-pokery in there

2) PLT thing as people point out above is v cheeky

3) I felt like they were hinting that high revenue growth is over for PLT and Boo brands...without saying that Nasty Gal could take up the slack

4) In the UK they are now relatively big. There's not much space left for them to go. If they don't make it work in US then they are a lower growth company (they seem to be making it work decently there and just making the point).

5) How will the new CEO view things at PLT and the family connection? What disturbance could this cause for business and shareholders.

Impressive business but the rating is impressive too!

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purpleski 24th Apr 25 of 39

Taptica International (LON:TAP)

I do hold and am sitting on a nasty paper loss, which arose on the conviction (which has already been declared as a risk) of the now ex-CEO. I personally just cannot smell anything so bad as to cause the share price to drop 60% from its high. i.e. that this company is now worth 60% less than it was 16 months ago.

As far as I can tell the sellers today are outsiders?

Of course if everything (particularly the cash) is a tissue of lies then this will end up being my first zero.

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davidjhill 24th Apr 26 of 39

In reply to post #471406

Mojo - on Taptica International (LON:TAP) I think you are pretty much spot on. The old insiders, who caused the stink, are now outsiders and moving on. Probably best!!
The RhythmOne (LON:RTHM) acquisition will need some tidy up. The buy back will continue to mop up loose stock.

I agree the new CEO looks decent and I think he is US based (is that correct?). Feels like this is moving more towards a US based/domiciled/centric business and away from previous Israel base.

I get why people steer clear though and I get why people think it is cash generative and good value despite the noise. Not for the faint of heart though!!

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NeilMenzies 24th Apr 27 of 39

I don’t think anyone knows exactly what is going on in Taptica but what I do know is that with the combination of the situation in Plus500, most people will be very cautious about investing in companies based in Israel. I still have a small position in Taptica in the hope that there is still some value remaining.

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mojomogoz 24th Apr 28 of 39

In reply to post #471436

David, yes CEO's US based. The CFO is also moving to the US (now necessary given the US focus that has been created through RhythmOne and Tremor and will be focused on tidying up RhythmOne). Historically, Taptica accounting seems nice and clean and no expensing, hence the good cash to earnings compared to some software businesses.

The business is staying in Israel and listed UK for now (their words)...I can't remember exact reasoning why (might be in notes) but tax benefits mentioned and something about the ability to use losses against profit from some historic acquisitions (not very sure on this last bit as trying to dig out of memory and might be worth asking directly from them for the official line again).

Taptica International (LON:TAP) makes me as nervous as I am greedy. Its an uncomfortable combo. I often buy things with controversy on them and like to believe I have the understanding and mettle to ride the rough. TBH Taptica is hard to say have the understanding...I've got some good guesses but the RhythmOne acquisition is a curveball as is the general fast pace of developments in the area they operated in.

Historically they have shown the ability to find a gap they can exploit profitably and then push hard.

The best thing the new CEO said at the investor meetings was how he would be using cost cuts from merger to generate cash for investment product promotion. That makes a lot of sense. Its the type of business you can't stand still. He criticised RhythmOne management for targeting EBITDA number rather than maximising growth

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mojomogoz 24th Apr 29 of 39

In reply to post #471416

purpleski, the cash seems real IMO

I sold a bit several weeks ago, partly due to price up decently on my buy and the RhythmOne merger adding opaqueness and probably some balance sheet cleaning to come. It was hard going to sell. Harder than it should be for a stock that isn't a tiddler and obviously has some interest on the buying side recently. I wonder now whether it was the ex insiders selling heavy.

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Edward John Canham 24th Apr 30 of 39

In reply to post #471456

Hi Mojo

Taptica International (LON:TAP)

Are you not concerned that the result of the placing has yet to be announced?


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Emperor 24th Apr 31 of 39

In reply to post #471281

Interesting comment from Snoo on Loungers liking the format of street level entrance but upstairs provision of services. Outside London that generally doesn't turn out too well... Which reinforces a previous comment that they are aiming high with a target of 500 outlets.

Will have to try hard on the promotional front to get people up the stairs. Most popular mid-market offerings tend to do best when near the competition and all visible. Flow over from one to another, if they are any good, then makes up a useful proportion of trade. Difficult to see upstairs. Just a view.

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alpha2 24th Apr 32 of 39

Although I have not been to a Loungers venue yet I did hear their MD talk a few years ago. The key takeaway was that the offer was designed to trade from secondary sites so they were not getting tied into high st rentals.
The locations, Newport, Chippenham, Staines, Epsom, Bury St Edmunds etc suggests that this has been working. There is still huge potential in those secondary towns. I was brought up around Daventry and Rugby, both pretty uninspiring places where price tends to determine success before quality. They could both do with a loungers.
It would also suggest they are well placed to expand into lots of vacated or empty sites in towns like that.. I think even if they continue to do well there will be far better opportunities to buy in further down the line.

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Raelyn Brown 25th Apr This post has been moderated
mojomogoz 25th Apr 34 of 39

In reply to post #471461

Yes I am concerned!

But then when I try to be rational through the noise (obviously a highly subjective and potentially flawed thing to do), I think I should still be there and not knee jerk away. I am assuming that during yesterday there was some price discovery and my judgement (obvs I mean guess but its not groundless) is that there are keen institutional buyer at prices above yesterday's price recently. The strategy of the group and now meaningful presence in US with blue-chip clients provides a considerable upside story, and the new CEO is reasonably impressive.

Waiting for imminent egg on my face ;)

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william westgate 29th Apr 36 of 39

I begin with the unorthodox view that concentrated portfolio is better than a diversified one. That is, those who have a deep understanding of both finance and markets should spend their time identifying a handful of truly excellent companies and buy them rather than scattering chips all over the investible world. With this is mind, AB Dynamics is such a candidate to be heavily concentrated in; It operates in a great new sector, has great management, and has outstanding financials (look at its latest report!). Moreover, it has hardly been discovered by the general public. No doubt, at nearly £22 per share, a great deal of good news has now been discounted but it is still a wonderful company with huge expansion plans. Tempted to sell here? Of course! Then again I have been similarly tempted throughout its journey from its IPO of around £1.00 in 2013. I dunno, maybe today marks the all time high print... but there's precious little evidence to support that emotional fear.

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mercury61 11th Jun 37 of 39

the stink continues...
Taptica International Ltd (AIM: TAP), a global leader in advertising technologies for brand advertising and performance-based mobile marketing, has learned that Uber Technologies, Inc. filed a complaint in the Superior Court of the State of California (U.S.), County of San Francisco, against Taptica Ltd. and Taptica, Inc., four unaffiliated companies and numerous (up to a further 100 "John Doe") companies, alleging fraudulent concealment, negligence and unfair competition.

Based on the information available to the Company to date, the claims appear to be without merit; Taptica Ltd. and Taptica, Inc. will aggressively defend against these claims

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mojomogoz 11th Jun 38 of 39

In reply to post #482726

We’ll see. Could just be Uber trying to use its muscle to beat down competitors. For example, Curb is one of the few taxi apps to compete well and it used Taptica International (LON:TAP) heavily for location and event based marketing. So, may be more positive proof than spooky counter proof.

Price has taken a dive as flux is high, investors are nervous and RhythmOne is being digested. Profit expectations are hard to fathom but being conservative they are probably a bit high as some tidying up at messy RhythmOne required (expect exceptional write down and costs of integration) but even then valuation looks very low implying something very bad is going to happen might but unlikely this drive by Uber shooting is that.

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abtan 10th Jul 39 of 39

For anyone following Boohoo (LON:BOO) I've noticed a material increase in instagram followers for both MissPap and Nastygal recently.

MissPap has gone from 1m ---> 2.4m in a matter of weeks
Nastygal had 1m followers in April ---> 3.8m today

There is clearly a big push taking place for these 2 brands at the moment.

No position, though I remain interested

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 Are LON:ABDP's fundamentals sound as an investment? Find out More »

About Graham Neary

Graham Neary

Full-time investor and independent analyst. Editor at Cube.Investments, small-cap writer at Stockopedia. Previously a fixed income analyst in the City and institutional fund manager. I'm a CFA charterholder and have the Investment Management Certificate and STA Diploma in Technical Analysis for good measure. When I'm not talking about finance, I enjoy recreational poker, chess and Mandarin Chinese. more »


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