Small Cap Value Report (Wed 24 Jan 2018) - FEVR, UBI, HSW, EMR, HOTC, CRPR, STAF

Tuesday, Jan 23 2018 by
74

Hi, it's Paul here.

Please note that I added more company sections to Tuesday's report last night. So to recap on yesterday's report, here is the link. It covers the following companies:

Elecosoft (LON:ELCO), LPA (LON:LPA), Boku Inc (LON:BOKU), Eagle Eye Solutions (LON:EYE), Flowtech Fluidpower (LON:FLO), SCISYS (LON:SSY), Velocity Composites (LON:VEL), LoopUp (LON:LOOP), Lakehouse (LON:LAKE), dotDigital (LON:DOTD)


Please feel free to add your comments, and small caps requests below from 7am! I like it when readers give your own view, rather than just asking for mine! This is a team sport, so your views & ideas are welcomed.

I will start off by tackling 7 companies today - Fevertree Drinks (LON:FEVR) , Ubisense (LON:UBI) , Hostelworld (LON:HSW) , Empresaria (LON:EMR) , Hotel Chocolat (LON:HOTC) , James Cropper (LON:CRPR) , and Staffline (LON:STAF) - so since those are already on my list, there's no need to request them in the comments below.


Fevertree Drinks (LON:FEVR)

Just a brief mention of this premium mixer drinks company, as it's now way above our usual market cap range here.  It announces today 2017 revenue of £169m, up 66% on 2016. This is also above the broker forecast of £159.3m shown on its StockReport.

Profits? "Comfortably ahead of market expectations". Talks about the global opportunity. There have been recent takeover bid rumours/speculation in the press. It's on a very high (c.60) forward PER, but when a company keeps beating expectations, as this one does, then the actual PER is lower than it appears. Well done to investors who spotted the opportunity here. A learning…

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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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Fevertree Drinks plc is a United Kingdom-based holding and investment company. The Company is a developer and supplier of premium mixer drinks. The Company's premium mixers consist of a range of all natural carbonated mixers, including Tonics, Ginger Ale, Ginger Beer, Bitter Lemon and Lemonades. The Company sells a range of products under the Fever-Tree brand, which include Indian Tonic Water, Naturally Light Tonic Water, Elderflower Tonic Water, Mediterranean Tonic Water, Ginger Ale, Ginger Beer, Naturally Light Ginger Beer, Bitter Lemon, Sicilian Lemonade, Lemonade, Spring Soda Water and Premium Cola. The Company caters to hotels, restaurants, bars and cafes, as well as supermarkets. The Company sells its products to a range of markets, such as the United Kingdom, Europe and North America. more »

LSE Price
2671.06p
Change
-6.9%
Mkt Cap (£m)
3,330
P/E (fwd)
50.6
Yield (fwd)
0.5

Ubisense Group Plc is engaged in providing enterprise location intelligence solutions for manufacturing, logistics, transit, communication and utility companies. The Company operates through two segments: Real-Time Location Systems (RTLS) and Geospatial. The RTLS segment takes real-time location data from its own sensing hardware, or from standards-based integration with third party hardware, and transforms this data into spatial event information, delivering asset identification, real-time location and spatial monitoring. The Geospatial segment delivers software solutions that integrate data from any source, including geographic, real-time asset, global positioning system, location, corporate and external cloud-based sources into a live Geospatial common operating picture. The Company offers various products, such as SmartSpace, Smart Factory, myWorld, myWorld Damage Assessment, myWorld Inspection & Survey, myWorld Network Insight, Dimension4 and AngleID. more »

LSE Price
60p
Change
-4.0%
Mkt Cap (£m)
45.7
P/E (fwd)
n/a
Yield (fwd)
n/a

Hostelworld Group plc is an Ireland-based company, which provides hostel-focused online booking platform. The Company operates through over 20 different languages by connecting young travelers with hostels around the world through its brand Hostelworld and supporting brands Hostelbookers and Hostels.com. The Company, through its subsidiaries, provides software and data processing services that facilitate hostel, hotel and other accommodation across the world, including ancillary online advertising revenue. The Company focuses on hostels, which maintains a global hostel database with over 13,000 hostels and approximately 22,000 other forms of budget accommodation available across the world. The Company builds a progressive internal training policy that includes ongoing skills training, personal development training plans and management development. The Company has over eight million reviews across approximately 33,000 properties in over 170 countries. more »

LSE Price
167.65p
Change
-4.6%
Mkt Cap (£m)
168
P/E (fwd)
10.5
Yield (fwd)
7.4



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


69 Comments on this Article show/hide all

gus 1065 24th Jan 50 of 69
2

In reply to post #303828

Re. Pets at Home (LON:PETS) , you may not have seen the after hours RNS that KKR are placing the last of their residual holding overnight via Merrill. About 12% of the company/62 million shares. Helpfully posted with no mention of Pets at Home (LON:PETS) in the title. Presumably these will go at a discount - interesting to see just how big. Last time they sold a big chunk it knocked something like 15-20% off the price as I recall.

https://www.investegate.co.uk/bofa-merrill-lynch/rns/proposed-placing/201801241655478453C/

Gus.

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JohnEustace 24th Jan 51 of 69

In reply to post #303898

So far I bought a starter holding in ISHRS GLBL TIMBER FRST USD DIST ETF (LON:WOOD). I’m rubbish at actually paying attention to things unless I own at least a little. I chose it over Pictet because that fund seemed to have more paper and card manufacturers in it and I’m unsure about their ability to pass on the higher costs.
I put the top ten holdings from WOOD and the Pictet timber fund into a Stocko portfolio and there are a few that have 90+ ratings. They are: Canfor, West Fraser Timber, UPM Kymmene OYJ, Stora Enso OYJ.
I may buy some West Fraser Timber and Canfor, don’t think I can buy the Scandinavian ones.

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willhampson 24th Jan 52 of 69
1

In reply to post #303918

I hadn't seen that - thanks gajri. Unless Lamprell (LON:LAM) come to some kind of agreement, the liquidated damages for these kind of projects can be colossal. The contract will usually provide a daily rate so I'm surprised they haven't at least included it with the RNS, given that they seem to be anticipating having to pay it. Moreover, given that Lamprell are incurring an additional $80m to appease the client, it would seem pretty clear that they have accepted that liability for the delays falls on their side.

I had this on my watchlist mainly thanks to Paul's helpful analysis re the cash pile; it's now going off that list. Many thanks!

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aflash 24th Jan 53 of 69

In reply to post #303933

Interesting, thank-you.

The story so far: .........I am going the discount route. Discounts applied to property valuations as well as share price discounts to NAV.

The Asset Revaluation half-year report from Cambium Global Timber (TREE) impressed me by its professional detail. The reference to their liquidations in one of the articles of 'Investment Trust Insider' strikes me as inaccurate so far but ............now read on

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Metatron 24th Jan 54 of 69

In reply to post #303933

I hold Acadian Timber ADN.TO on the Canadian Exchange.Apart from Canfor and West Fraser also have Western Forest WEF.TO on a shortlist

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jonesj 24th Jan 55 of 69
1

In reply to post #303553

I don't see  Hostelworld (LON:HSW) as operating in any kind of niche. They offer dorm rooms in Hostels and conventional hotel rooms.

Something like Booking.com offers dorm rooms & conventional hotel rooms too. Quite an overlap.

Going back over 5 years, I used to sometimes use Hostelworld for booking proper hotel rooms, but gave up as their site keeps quoting price per person, rather than price per room.

As for the hostels, if they are on places like Booking.com, same as Hostelworld, Hostelworld are just another player in a crowded market. Careful analysis would be required.

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matylda 25th Jan 56 of 69
1

In reply to post #303933

John,

Interesting to read your journey here so far in relation to timber, actually made me chuckle a little.

Just wondering, what makes you think timber is going to continue going up or are you just amusing yourself on the sidelines with a small interest?

Just asking, I suppose, because I was pondering the other day 2 things - Which ETF to get involved in Africa (which is due to follow (try to catch up with) China and India apparently) and which ETF to get involved in the electric car?

I didn't get very far in my thinking but will give it some more thought for sure - I suppose I came from the point of view these were the 2 biggest growth areas I could think of in the next 5 - 10 years and beyond. I will get involved just need to consider how best to.

Cheers!

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mercury61 25th Jan 57 of 69

In reply to post #303928

Wait and see the effect. A good buying opportunity could arise. All the best and thanks

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gus 1065 25th Jan 58 of 69
1

In reply to post #304103

Pets at Home (LON:PETS) Placing completed at 174p compared to market close of 185p (and 193p the previous day - I suspect some front running being done yesterday ahead of the placement). Could have been worse although may see a bit more slippage this morning. At least the KKR overhang has now gone.

I also noted the CEO has opted out of the company share save scheme (separate RNS). Small beer - about 8,000 shares - but what kind of message does it send when the CEO doesn’t participate in a tax advantaged saving scheme to buy shares at 157p?

Gus.

—————-
25 January 2018

Further to the announcement released on 24 January 2018, entities owned by certain funds managed and advised by, or otherwise affiliated with, Kohlberg Kravis Roberts & Co. L.P. ("KKR") have sold an aggregate of 62,013,086 ordinary shares in the capital of the Company at a price of 174 pence per share (the "Placing") raising aggregate gross sale proceeds of approximately £108 million through the Placing. Following completion of the Placing, KKR will no longer hold any ordinary shares in the capital of the Company. Pets at Home will not receive any proceeds from the sale.

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mercury61 25th Jan 59 of 69

In reply to post #304118

Very interesting and well spotted Gus. Yes very odd can't get my head around that one. I do find that their 'shop' prices are a bit steep.

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ISAallowance 25th Jan 60 of 69
1

In reply to post #304083

Hi Matylda,

I wondered how to get exposure to the electric car, and eventually settled on buying a copper producer (Central Asia Metals (LON:CAML), before it went and also bought a lead/zinc mine!), on the grounds that a lot of electric infrastructure around the world will need upgrading to support an EV transition, and copper is a core component of electric infrastructure.

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JohnEustace 25th Jan 61 of 69
2

Hi Matylda,
Yes it’s a bit of a sideline for me. I generally hold a couple of ETC’s; currently ETFS ZINC ETC (LON:ZINC) and ETFS PHYSICAL PALLADIUM ETC (LON:PHPD). They can be attractive momentum plays because the cycles are lengthy. It takes time to start or ramp up production. In that context it occurred to me that timber supply could be inelastic.
I did look at £LIT for electric cars but realised there’s actually a lot of lithium in the world. Africa is interesting but I don’t know what I would buy there.
FWIW, Jeffrey Gundlach, the current king of the bond markets, says commodities are the place to invest in 2018.
https://www.cnbc.com/2017/12/13/doublelines-gundlach-says-best-idea-for-2018-is-commodities.html

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MarkLDN 26th Jan 62 of 69
1

In reply to post #303553

Good points ratioinvestor.  I can add some further colour.

  • H2 for Hostelworld (LON:HSW) is indeed their slow season; peak is Jan to June.  Bookings in the year grew 6% overall and 1% in H2 but 13% in H1.
  • The other platforms they own are Hostels.com (acq'd 2003) and Hostelbooker.com (acq'd 2013).  They have converted the backends to use their proprietary software but have engaged in active conversion and have otherwise ceased all investment in the platforms.  And so what you want to see is complete cannibalisation otherwise they are losing customers.  There are currently no other direct competitors operating solely in the hostel segment.
  • Yes, the platform is only growing at 6% overall but they are expanding into very low revenue areas (all that's left!).  We should expect to see average booking transactions fall as volumes pick up, as hostels in the more exotic growth markets are a fraction the cost of European hostels and therefore the commission that Hostelworld (LON:HSW) takes will also be fractional.  Currently, this is €11.5 but to give some perspective I just travelled through 14 countries in South America and our average deposit was $1.  Saying that though, Hostelworld had plenty of available hostels wherever we went around the world.  I therefore think my next point is the real key to growth.
  • £PCLN.  We found ourselves using Booking.com a lot as it doesn't require an upfront deposit.  Hostelworld (LON:HSW) is countering this by investing in social features to advance its USP.  For example, last year they gave hostel managers the ability to communicate hostel events over the app.  They are also releasing, or have released, a feature to allow guests using the app to speak to other guests in order to organise social gatherings.  I don't think Booking.com could replicate something like this without releasing an app of their own which only did hostels.  The social aspects of travel are THEE reasons for travel.  There is a lot of untapped value there helping people connect.  Hostelworld (LON:HSW) needs to win customers over from Booking.com, and I believe there are many to be had.
  • The third portal of growth is marketing.   They have a strong history of commercials trying to convince non-hostel users of the benefits of hostels.  Google the 50 Cent or Charlie Sheen commercials! 
  • I don't think it will be a huge growth story in the short term but that's not why I invested.  I see it as a safe way to ride the future growth trajectory of travel and receive 75% of its solid cash flows in the process.  Perhaps that is what justifies the PER of 20.
  • Also, no debt!
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Ramus 26th Jan 63 of 69

STAF.
CFO until Wed.was ex serving Infantry officer. Not an Accountant. His ex boss said he remained very focused under severe pressure. He has also set up web so his 50000 odd workers can report on their gripes. He is now CEO. Looks a very safe pair of hands.

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Andrew L 26th Jan 64 of 69

In reply to post #304028

Jonesj - I would disagree as Hostels themselves are a niche of the travel market. People stay in hostels for a social experience and not just for somewhere to stay. Booking.com serves the entire market I believe. There are young people who travel and only want to stay in hostels given that they are low cost and social. If you look at hostels today they have changed significantly from the Youth Hostels in the Lake District etc.

Hostelworld has added value features such as a translation service etc. Also its reviews are I believe verified and only on its platform. I am not saying that the Hostelworld booking platform is for everyone but for some people it would be ideal. People who are willing to share a room with strangers are I think a specific niche of the travel sector. I'd suggest that when you used hostels you didn't use them for the social element. However, a lot of young travellers do so.

I do accept your general premise that competition from alternative booking platforms is a key risk or alternatively from consumers going directly. However, there will be people who use hostels and prefer a specific booking platform that is focused on hostel type accommodation.  It is fair to say that the online travel sector is a crowded market.  That is why companies focused on niches are possibly the best bet I.e. On the Beach for beach holidays and Hostelworld for hostel travel.

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Andrew L 26th Jan 65 of 69

In reply to post #304713

Thanks for your interesting comments. The deposit (i.e. booking fee) for Hostelworld has been a bone of contention. I believe it is non-refundable. A good point you made about lower booking fees in markets outside of Europe. I don't really know Hostelworld's market share. However, reviews for the App are generally very good on Apple's app store. I can only say that if I was travelling and staying at hostels I would prefer to use a specific app rather than Booking.com. This is because it focuses on the type of place where I would want to stay.

At the end of the day it is about ease of use and time. People can look for hostels in google search and then look at reviews and then book directly. The time to do this is fairly long and booking directly is not without risk (card details etc). Travelling is quite stressful (train times, languages etc). An app that makes things easier can be a help. I don't think Hostelworld is for everyone. But then neither is a company like Just East but it still does very well. An American or Australian coming to Europe may want to have a simple way of finding and booking hostels.

I agree on growth and the profitability of new markets. New hostels are being built though such as through Safestay and other companies. Hostelworld can help facilitate the social aspect of hostels which is the very point of using them. I think the main risk is that they could be seen as price gouging with the booking fee. There is a lot of negative feedback about how booking through hostelworld is more expensive than going direct. 

However, there is always a market for convenient and easy to use services even if they charge more - time is money.  The people who do use Hostelworld seem to love it for making hostel travel simple and easy.  I have found general booking platforms like Booking.com too complex and with search results that aren't relevant.

I agree the valuation seems full given the modest growth.  However, Hostelworld is likely to pay special dividends and has bottom line leverage.  Marketing as a percentage of revenue should decline over time as consumers become loyal to the app and don't go through search engines.

It is also fair to point out the risks with a number of US booking platforms not performing well.  Trivago I think has done badly along with Tripadvisor.  This seems like a great business until someone else takes away market share.  I think Hostelworld should have a sticky customer base but I could be wrong.  Trusted pilot reviews vary from hatred to job.  Recent ones are mainly hatred!!

https://uk.trustpilot.com/revi...

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MarkLDN 26th Jan 66 of 69

In reply to post #305048

Wow, those reviews are terrible! The good news is that a) the company can read these comments and take action before its too late, and b) it has 4 stars overall. I must say we never had any experience like those mentioned under the 'hatred' categories. People seem to have a problem with the "deposit" but it is a perfectly sensible mechanism. Hostelworld provides independent businesses, with low marketing budgets, a platform to book customers in advance, and the former charges for that. The "haters" on Trustpilot don't seem to appreciate that! Booking.com does the same thing except the owners have to pay them after the fact (15% I believe). Airbnb takes a cut upfront. Nothing is free in life. Online will always be more expensive than going direct.

The deposit is not contentious in my view and the savvy backpacker will approach a hostel on a seemingly slow day and always ask for a discount. In fact, on several occasions during our year of travels, we used Hostelworld and Booking.com to prevent being scammed by savvy receptionists! "You charge how much? Hostelworld says it is X per night?" "Okay, X is fine." The hostels benefit from free advertising effectively.

In terms of market share, I would say they are dominant at the high end of the hostel market. It is still possible to find hostels not advertised on either. These are usually very budget, family-run places that, for their own reasons (like not possessing a computer), are not on the platform or have left the platform. Can only be found/accessed by walking in the front door (but possibly still on Google Maps). Booking.com tended to have coverage of both the top and middle offerings.

My last follow-up point, and this possibly touches on what a lot of the complainers experienced, was that an upfront, non-refundable deposit does not give you the option to "try before you buy" - walking in and checking the place/room out. This was our preference while we were backpacking and so ruled out the use of Hostelworld. Not all of the places live up to the glamorous photos!

Confident none of these points we have raised are dealbreakers and can all be overcome with further innovation.

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Andrew L 26th Jan 67 of 69
1

In reply to post #305063

Yes reviews are a concern. But I think the app suits some people. The app reviews are good in the Apple's app store. Doing my sums and last year they had cash balances at €24.6m at year-end. They paid out a 10.4 final dividend and a 10.3 special dividend so 20.7 in total euro cents.

Cash balances were €16.4m in mid-2016 versus €17.6m in mid-2017. Shares in issue are 95.6m so current market value £344m or €392m. I would estimate about 7% of the market value in cash at year-end. Taking that of the forecast P/E gives and 18.4X P/E for the current year excluding cash..

I expect they will pay an increased special dividend on a year ago. If we assume 22 euro cents in total this comes in at 19.3p or 5.3%. I guess this is the main attraction of the share. The total final payment for this year should be over 5% if my sums are right. Factoring in the interim dividend and we are potentially getting a stock with an annual yield close to 5.5% that is growing over time. All assuming the special dividend continues to be paid. I guess this is the attraction of the stock. Freecashflow growth translating into a robust and growing yield.

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MarkLDN 26th Jan 68 of 69

In reply to post #305118

You said it. They are rationalising their cost structure (mentioned some staff cuts in a previous annual report) and all the excess comes off in special dividends. It seems the major construction is complete, the product works, and it will soon just be a/b tinkering to grow the top line.

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Andrew L 26th Jan 69 of 69
1

In reply to post #305133

Key driver is marketing margin really. I think they can improve this. They highlighted as much in H2. This has a leveraged bottom line impact. Businesses that can improve margins as they grow are very valuable. Hostelworld should be able to do this as more consumers go direct to it through the app. Will have to wait for results in April!!

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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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