Small Cap Value Report (Wed 24 Aug 2022) - ALM, LOOK, TMO

24th Aug '22 by Graham Neary

37 comments 6779 reads

Good morning , Graham and Megan here this morning as Paul is off.

Summaries

Allied Minds (LON:ALM) (£26m) (-42%) [no section below] - let’s put a full stop on the story of Allied Minds. This was a Woodford-backed venture which at one point in 2015 had a market cap of over £1.5 billion. It’s a collection of blue-sky technology investments, as the underlying companies have typically been in the research phase, i.e. quite a long way from generating any revenues. The thesis was that at least some of these investments would succeed, and that a patient, long-term ALM shareholder would do well. Unfortunately, we have now arrived at the long-run destination and it’s a possible delisting: “the costs of maintaining a premium listing on the Official List and the Main Market of the London Stock Exchange are now prohibitively high”. Cash has dwindled to $9.7m (December 2021 balance sheet) plus a few million dollars from a disposal. ALM’s portfolio now has just five companies and it is surely a matter of time before ALM winds itself up - whether or not it keeps its LSE listing.

Sopheon (LON:SPE) (£68m) ($80m) (-1%) [no section below] - This enterprise software group shows an H1 operating loss, albeit a small loss ($0.8m) in the context of the company’s overall size. I find it frustrating that the company refuses to acknowledge the loss in its headlines, only mentioning that adjusted EBITDA was $2.9m (last year: $2.8m). Management appear overly keen to portray Sopheon in a positive light, despite reported revenues falling (to $15.7m). The type of contract signed with customers has changed, and the company says this is to blame for the lower amount of revenue recognised. Many other factors combine to bring about these poor results: unfavourable currency fluctuations, salary inflation, a small impairment provision against development costs, and large share-based payments ($3.7m, which are excluded from adjusted EBITDA).

Sopheon does have a large net cash position ($23.5m), which is just as well since it has capitalised $3m of development costs in this six-month period, i.e. these are costs that are not included in the latest operating loss. I still suspect Sopheon has a decent underlying business, but it is requiring enormous patience. Annualised recurring revenue has reached $21.9m, so the market cap (ex-cash) works out at around 2.5x recurring revenues. At least this valuation isn’t too frothy; this…

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John Gibson

24th Aug '22

And sometimes you can be up too late!

Diversification 99

Seems the board of Allied Minds have a lot to answer for over the years for the destruction in shareholder value. The board seem to have done very nicely with the remuneration packages. Even Allied Minds failed to effect meaningful change. So much waste of shareholder funds, for example, millions were being paid for a leasehold property which was probably not needed.

An old article but shows the kind of issues going on at the company.

I held previously but sold for a profit so a lucky escape

https://www.lightreading.com/p...

sharw

What is his latest name? @paulypilot shows Account suspended

Martin_576

Great analysis as usual this morning. Couple of small typos in Time Out (LON:TMO) - you mean m not bn

But the ambitious expansion project had come at a severe cost to the balance sheet. In December 2019 the company was sitting on £44m of net debt, including £5bn due to be repaid within one year and £38bn due to be repaid within two.

Silver Moon

Paul, Lookers (LON:LOOK) I first bought in 2016 and it's no surprise to me that you ponder over it. Your assessment could well prompt me to double-down but the average price I paid was 111 pence a share, a note I left myself was to sell at 130 pence. This day may come to fruition but it has been a bumpy ride and may well continue to be so I will remain a cautious holder.

Megan Boxall

Thanks Martin - good spot, will change that now

Michael C

Lookers (LON:LOOK) Anecdotes from investors about single instances are sometimes of dubious value, but I will post this, not about Lookers specifically but about the car trade. For 3 months we have been looking for a modest SUV, something below the £40k road tax threshold. We had time to shop around so we had test drives in several cars. The "boom" atmosphere in all the different dealerships raised the hairs on my neck. So we hung on. Last week a Toyota dealer came back to us and offered us a discount on a new car, and when I haggled he increased it. Quite a chunky discount actually, about 7% all-in. We haven't got a firm delivery date, the estimate of January is tentative, but that's normal. The point is I definitely got the feeling this salesman really wanted the sale.

Something else I picked up - we are really unusual because we are cash buyers. When I queried this, in 2 separate dealerships, I was told that absolutely nobody under the age of 40 wants to know the price of a car. They only want to know how much the monthly payment is. Nobody under 40 has any actual money. It's only older people like us that pay cash.

I'm posting separately about something else concerning Lookers (LON:LOOK)

Dieselhead2

Much appreciated Graham, thankyou very much.

DH2

Andy Sav

Scotty @sco15375772

Graham's comments about the property values underpinning Lookers (LON:LOOK) made me think again about my lunch yesterday in a J D Wetherspoon (LON:JDW) pub when I sat looking at the share chart, wondering if the bottom was in (spoiler: it wasn't). As we all know 'Spoons owns the freehold of a lot of its sites, and I think this is a good thing. But I found myself asking, if they couldn't make this particular site pay, who would want it? I don't mean that this particular site is loss-making - of course I don't know one way or the other - but it's a large historic building with some quirks and I wondered who would take it if they had to offload it. So long as they are there it has value, but if they vacate it who would actually want it as a property investment? Somebody would, but what would it actually be worth if J D Wetherspoon (LON:JDW) didn't want to own it or lease it? And today I find myself asking the same question about the car showrooms etc. on the balance sheet of Lookers (LON:LOOK)

Effortless Cool

Michael C,

The value surely comes through their alternative use as brown field development sites. There are very few car showrooms of architectural merit, so that is rarely a barrier to redevelopment.

"what is embarrassing ..."?

His po-faced response to levity is.

Helvellyn

Michael,

After years of buying new or nearly new cars for cash and keeping them 7 or 8 years a friend persuaded me to try leasing, I am on my second lease now and I dont think i would go back , you dont pay any road tax, servicing intervals are usually 20,000 miles, so costs are minimal, you do choose a mileage allowance but the penalties for exceeding are not huge. I think the future of car ownership will be some type of lease/shared ownership, especially with EVs. whether this will include Car dealers or not i'm not convinced, maybe all manufactures, stronger ones more than likely, will go direct to consumer .

As for your comment re Weatherspoons freeholds, surely the same goes for most retail space and with WFH a lot of office space, I would think a lot of Spoons freeholds are prime for residential redevelopment.

Richard

Chrisfarrell21

Michael C - I know people in the commercial property game, and without trying to sound like a condescending tw@t (I will probably fail), this isn't something you need to worry about, on a general scale at least.

Except when harsh credit conditions abound, there's a healthy commercial property market out there, with its own rules/ for valuing properties, depending on location, comparative sales, usage, availability and cost of debt, etc. etc. etc..

The only time you should worry is about specific sites, e.g. if Wetherspoons has (say) a listed building, so you can't knock it down and start again, in a run down location with crappy transport links, where you can't readily convert it to other uses.

There's a multitude of reasons that people/organisations want to own, rent, or develop a building, and not all of them are money laundering ;) and a lot of those reasons won't be obvious to the likes of you and me.

I hope this helps.

Chris

Yusuf Samad

Graham

TMO seems to be struggling to refinance the Incus Loan of £20m due in November. This is disturbing. The Directors had flagged the refinacing in their comments regarding operating as a Going Concern.

On your comment below, note that the company is paying Euribor plus 11% on the existing Incus facility, more than what it will pay on the £8m borrowing from Oakley.

Losses are also narrowing at the operating level, but the company spent
£2.5m in finance costs in the first half, which looks likely to spike in
the second half now that the company is paying 10% inter

I agree, but what is their value as brownfield sites? Is it the same value as shown in the accounts? We just don't know.

"Except when harsh credit conditions abound..." but that's really my point. The values given to freehold properties in most company accounts are those which applied in recent times. What happens if there is another credit crunch?

My starting point for all this is the Bank of England's statement in February that they have cut the magic money tree off at the roots. No more money printed out of thin air. And by the way would the government start repaying its debts please?

"I would think a lot of Spoons freeholds are prime for residential redevelopment." Yes, but does that give them the same value as the balance sheet? We don't know.

nicobos

25th Aug '22

Same here Richard,

After struggling to sell a car a few years back I saw the market had moved to largely a 'trade' market. I looked into leasing as an alternative and worked out that it is far cheaper if i) you want to buy a new car, ii) you are not clocking many miles in a year, iii) don't care about being the 'owner' (sounds strange but a lot of people want to feel they 'own' something)

My first lease (six years ago) was a Ford Fiesta ST which cost £125 per month (+ 9 months upfront). Nippy little car for little over the cost of some mobile phone contracts.

What the average punter doesn't realise is that the lease company may order say 100 cars off the manufacturer at a time and will negotiate a far better discount than you can buying 1 off your local dealership (maybe 20-25%). They also order and fill production slots in the manufacturers schedule which are not used (yes, car factories don't switch themselves on and off depending on demand!) so can negotiate very good deals.

They then 'pre-sell' those 100 cars to say British Car Auctions in 2/3 years time for a higher 'trade' rate than you can sell your car privately. Second hand cars with not many miles make good secondary sales.

Therefore, they lock in the depreciation cost at a far far better rate than an individual buyer / seller is able to achieve. & can pass on some of the savings to you!

This is why if you are buying a new car with the intention to only own it for ~3 years (highest part of the depreciation curve), it probably makes financial sense to lease.

I need to go to work so no time to illustrate the maths but hopefully you get the point !

Graham Neary

Thanks for the comment Yusuf, for your info it was Megan who covered TMO in this report. Best, Graham.

Small Cap Value Report (Wed 24 Aug 2022) - ALM, LOOK, TMO

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Graham Neary

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