Small Cap Value Report (Wed 24 July 2019) - JOUL, QTX, SPE

In reply to post #496396

At a guess, it might be due to sales through third party websites? e.g. Joules sells through Next's website, for example.

Ok , not quite a small cap at £260m but it may get there ;-) ...

De La Rue (LON:DLAR) issued an RNS yesterday afternoon saying the Serious Fraud Office has opened an investigation  in relation to suspected corruption in the conduct of business in South Sudan.  How on earth anyone can consider winning business in this part of the world without corruption is beyond me, but that's not the story... Anyway, the shares were off by some 16% in response to the announcement.

In recent times activist investor Crystal Amber Fund (LON:CRS) have been seeking changes at board level for value destruction  (On 30 May 2019, in response to the announcement of its full-year results, De La Rue’s share price fell 34%) and for paying bonuses for non-performance. Their activities have become somewhat acrimonious with both parties engaging with social media, the press and RNS exchanges regarding the subject.

Now with the SFO investigation commencing it is somewhat unfortunate that DLAR recently said in an an RNS that they have the 'highest standards of governance'.

Companies now have strategy for dealing with SFO. Broadly speaking it is to be open and engage with the SFO (to avoid really heavy fines), say the persons involved hid the activities from the Board and those persons have left the company already, change board members, say sorry and pay one-off fine 12-24 months hence which is treated as an exceptional charge. 

This plays right into the hands of Crystal Amber and provides them opportunities over the coming months to further flex their activist ambitions.

Nevertheless, the business itself needs something of a doable turnaround. It has the hallmarks that investors demand. High barriers to entry, strong growth opportunities, a prior takeover approach but what it apparently lacks is a competent Board of Directors/Chairman 

Some might say that the SFO may discover further evidence of corruption in other markets. true, but from what I have seen the SFO do not take these matters any further. They just require one case to prosecute to achieve their aims. It should be remembered that the SFO do not set out to destroy a company, causing lay-offs etc but to demonstrate to DLAR and other companies that such activities will not go unpunished; so the Sudan investigation is likely to be the be all and end all of the matter with any other suspect corruption activities being wrapped up in a statement along the lines of 'a culture of poor governance was endemic' and leave it at that.

Anyway, I am not a holder in DLAR (although I was back in 2005/6) but I see this as a potential investing opportunity over the coming weeks/months for LONG TERM share holders.

Just thought I would share...

Joules is similar to Boden. If it continues to expand internationally and online the  forecasts may be undemanding and shares ok value. it’s a safer bet than most retailers in the sector.

My morning smallcap tweet: Aston Martin suffers sexy stock curse.

Aston Martin Lagonda Global Holdings (LON:AML), IQE (LON:IQE), IMImobile (LON:IMO), Science (LON:SAG), Sopheon (LON:SPE), Vertu Motors (LON:VTU)

Aston Martin Lagonda (AML) Floated in Oct at 1800p and sinking rapidly. Cut FY wholesales guidance to 6,300-6,500 cars. Also £19m consultancy income recognised in Q2 2018 now a marked a bad debt. "Capital expenditure will be re-phased [BS for cut} to c.£300m in FY2019." Down 43% since float already.
IQE (IQE) commencement of initial VCSEL production for a second major customer at the Newport Mega Foundry and further positive qualifications. Several new qualifications in long term reliability testing. Two VCSEL contract extensions. Sounds great but I assume selling the wafers from the new machines is in the forecasts.
IMImobile (IMO) Pays £42.8m for a private US cloud-based multichannel, customer engagement platform company. Immediately earnings accretive. Placing at 310p, a 1p premium.
Science Group (SAG) H1 broadly in line with the Board's expectations. Rev-cont down 4% which was expeted. Pretax-cont up 22%.
Sopheon (SPE) warns FY rev flat Yoy . H1 trading: rev down 14% but sales pipeline up 48% since Jan. EBITDA $2m ($4.1m). Blames delay to some licences. Change to SaaS coming "sooner than we expected, but is in line with the Group's long term strategy."
Vertu Motors (VTU) AGM stmt. First 4 months LFL up 8% despite new retail vehicle sales volume LFL down 13%. Used & fleet better. Outlook "possibility of new vehicle supply restrictions, arising from new EU emissions regulations which come into force on 1 September, the Board is cautious on the short term outlook." I hold.

Agree on De La Rue (LON:DLAR) - "potentially interesting" but could also go horribly wrong.

Could you cast your eye over Sopheon Sopheon (LON:SPE) please Paul? I’ve sold out this morning but interested in your take - particularly on impact of customers moving to rental vs purchase model faster than anticipated.

I've been trying to work out what to do about £SPE this morning. I had fortunately sold half of my holding earlier in the year with a view to buying back at a lower price, but can't decide if this is the lower price I was waiting for... Somewhat kicking myself for not selling the remaining shares after the June AGM statement, which in hindsight was a clear warning that H1 was going to be weak.

I believe that the company has a bright future and that the pipeline they reference is real and will be converted in time. Although if I'm being honest with myself, I don't have any unique insight / edge to support this belief. I'm simply going on their recent performance, which has been very good.

I'm trying to weigh up...

Possible reasons to sell my remaining shares today (in the hope of an even lower price):
- increased execution risk: if business sentiment tanks, their potential customers may well decide to delay/forego licencing Accolade, which I don't think is fundamental to core operations;
- market is skittish and share price was already drifting lower. Could be likely to continue the drift down after today.

Possible reasons to buy more today:
- Share price already 37% off its peak and broker forecasts seem to have FY19 EPS down 30%. Could this fall now be baked into the price?
- If sales pipeline comes through strongly, they could beat the revised forecasts for FY19 - up to today businesses have wanted to licence their solutions, and I can't see any reason for that to stop cold - bumps in the road are to be expected.

I can't work which of the above is most convincing (answers and other points very welcome) so I'm probably going to hold onto my remaining shares for now and wait for more news flow in H2.

Research note released today from Progressive Equity on Sopheon (LON:SPE).

Really good results coverage today Paul. Thanks very much. I find it really helpful when you're analysing higher quality companies and assessing current buying cinditions. There's so much dross on AIM that trying to hone in on the nuggets makes sense.

In reply to post #496651

Thanks Dogon,

I much prefer focusing on 3-5 decent quality companies, and getting under the bonnet properly, rather than wider coverage of many companies that I think look awful!

Best wishes, Paul.

Agree very good results from Joules (LON:JOUL £JOUL) but for valuing them I think we should be looking at statutory results and statutory eps rather than what they call "underlying" which ignores the very hefty share based payment charge. The reason for adjusting this out seems to be that it is increasing (the implication being perhaps that the accounting convention means it was too low in previous years) so that ignoring it gives a better comparison of the underlying performance form one year to the next. Surely a better way would be to include what they think is a "fair" charge in each year's "underlying" results. I note also that they propose to include the share payment charge for 2020 in underlying results. That will make comparison with 2019 look rather odd. It may be that they expect not much charge this year if there are no new share awards in 2020 but I am sure there will be more in the future when perhaps they will adjust them out again.
For the moment I am inclined to look at the current p.e. ratio as closer to 20 which looks too rich for me even given the good performance.

In reply to post #496401

Thanks.
I always think discrepancies can be very informative, if you can identify the cause.

I second "Dogon's" comments. really good report today, thanks Paul! it's not just that there is so much dross about at the moment, even where there is quality it appears fully valued. Personally, i'm finding the markets extremely dull and it's increasingly hard to motivate myself. I don't know if this means it's best avoiding or doubling my effort, as i'm sure many others are in the same boat!

Sopheon (LON:SPE) - I hold a small amount and intended to add if valuation improved - while the price has fallen, I would suggest valuation has not - I am certainly in no rush to add on the back of announcement today - I won't be selling either.
Thanks Paul for the write up - made me more comfortable with the decision.

In reply to post #496791

Indeed - great report today and all of this week - some fantastic insights.
I opened a position in Quartix Holdings (LON:QTX) and the analysis was great - of course if I lose money I know who to blame :)

I am not sure I agree with the dross - across the market cap spectrum, there are being wild moves on results ( ITV (LON:ITV) today, Burberry (LON:BRBY) recently, Barratt Developments (LON:BDEV) ), which to me clearly signals that the market is not at its most efficient (then again Woodford been saying that for a while).
I certainly see a lot of opportunity in particular in the homebuilder space - Redrow certainly has some appeal given divi and p:b

What is everyone's views on the car dealers right now - Vertu Motors (LON:VTU), Pendragon (LON:PDG), Marshall Motor Holdings (LON:MMH) etc. I can't decide whether this is a massive value trap or whether these have got some kind of deep value style investing about them.

ref the car dealers - i guess we simply don't know - i have been very bearish in general simply due to the
fact electric is the way to go - that's less parts and probably more SAS "software as a service" - which may be easier dealt with in house ala Tesla - and the maintenance is the golden goose for these franchise dealers take away 50% of the maintenance element that is there now and does that leave enough fat to cover the overheads and return a juicy profit?
I guess i would start by looking at which i thought had the potential for highest NTAV per share if they had to close down and also a company where they are less reliant on one or two manufacturers to avoid the wipeout in one go if the manufacturer takes everything in house or semi in house - or i would perhaps a basic dealer of second hand cars (cant remember the company name that is the main listed one) is more likely to still be in business?.

This is even ignoring the scenario where there are a boat load of self driving cars driving around where people don't own but own a share or pay per use.

On the flip side pe of under 5 (some?) and decent NTAV - one would like to think the profits being made in the short term should give one some sort of runt left worst case scenario. So i see the appeal from the pure numbers perspective so it may be rewarding for those brave enough perhaps? if it is as it was or so in 6 or 7 years time.
If only i had a time machine to go and check and report back.

rmillaree you make reference to maintenance and electric cars. I read an article about a week ago where car users voted (I think for Which/What Car?) on what they thought were the most reliable cars. From memory Suzuki was voted most reliable, with stalwarts like Toyota and Kia scoring highly. Whilst the car make voted least reliable was Tesla at (I think) just over 50% reliability. Maybe there is a future for car dealerships/garages with electric cars?

(Sorry, I wanted to use the Reply button but the screen went funny when I tried to use it).

In reply to post #496856

Hi Dan James Baker, this is an interesting question. At face value, car dealers appear to offer a lot of value based on valuation factors and it can be tempting to take a position based on these valuations and dividend yields that are on offer.

I haven't looked at the car dealers in detail, but on the Stockopedia page for £VTU I note the Bankruptcy Risk is high and analyst consensus forecasts are declining which suggests they are not quite at a turning point.

One impact may be from Worldwide Harmonised Light Vehicle Test Procedure (WLTP) which came into effect in September 2018. This had a significant impact on new car registrations as manufacturers struggled to meet compliance standards. I also wonder whether car financing is going to be the next financial issue where the FCA steps in.

Another way to play the car market, is via £AUTO which i acknowledge is a large cap. However, I did some research on them this week and was impressed at their operations and financials and transparency. OK, valuation metrics will be significantly higher than car dealers, but AUTO is more of a tech company that focuses on the UK car market. Whilst its main revenue comes from the second hand market, they are entering into the new car market. Revenue is derived from the number of retailer forecourts, impact of prices for stock (used cars), subscription price, and upselling of other products - which in FY 2019 contributed a significant element to performance.

It achieves operating margins in the 65% area which is in contrast to the low single digits that car dealers like VTU achieve. Alongside this, all the operating profit was turned into cash.

As you can imagine, AUTO is relatively asset light and can achieve high returns on capital compared to the car dealers.

Finally, AUTO uses approximately 75% of its profits to repurchase shares (45%) and payout dividends (29%) with the balance being reinvested in the business. It has provided details of other products and offerings it will be provided going forward to increase contribution from product.

One risk I noted was the current CEO is due to retire due to personal reasons (wanting to give back to his family who have supported him during his career) but the current CFO, who has been with AUTO for a long period, will move into the CEO role.

All in all, worth having a look at AUTO as an alternative long term hold.

In reply to post #496886

For what it is worth, I don't see electric cars wiping out servicing work. These days, the internal combustion engine seems to require very little spend, other than oil and filter changes, over the car lifetime. The bulk of my servicing spend goes on other bits, mostly brakes and suspension, and the annual inspection. This is all still going to be needed for electric cars. So I just don't see the garages disappearing.