Small Cap Value Report (Wed 27 Mar 2019) - GOAL, DEB, CALL, SAA, ABDP, ACSO, CHH

27th Mar '19 by Paul Scott

35 comments 11568 reads

Hi, it's Paul here.

Please see the header for the results/trading updates today which have caught my eye. I''m on a tight timetable today, so will work my way through as many of those as possible, before I have to head off around noon, to an investment seminar.

Goals Soccer Centres (LON:GOAL)

Shares suspended

I think this is probably the end for shareholders here. The company has today announced a "substantial mis-declaration of VAT" estimated at £12m. Presumably that means underpaid VAT. The shares are now suspended.

The Company intends to enter into discussions with HMRC immediately and remains in discussions with our lenders to agree new facilities.

Good luck with that.

I'd be amazed if the bank is prepared to continue supporting this business, now that it has become clear that the books were incorrect, by a substantial amount, over several years. Worse than that, the company's announcement today appears to be disclosing what might be VAT fraud, or at the very least, gigantic errors.

It seems improbable to me that a business of this small size can accidentally underpay £12m VAT. That's serious incompetence, possibly worse. We don't yet know the full facts, so I'm basing the above on what we've been told so far.

I imagine administration is almost certainly the outcome here, which would be a 100% loss for shareholders.

So here we have yet another accounting scandal. As we always seem ask - why didn't the auditors pick up the errors earlier?

Note that the long-standing (since 2000) CFO, Bill Gow, stepped down in July 2018. Once again, an unexpected departure of a CFO, turned out to be the precursor of trouble ahead.

Current trading is strong, but that doesn't really matter, given the problems above.

I warned here on 8 Mar 2019 that this share was uninvestable, when accounting problems were first disclosed. The moral of the story seems to be that, when any kind of accounting problems surface, the safest thing to do is to hit the sell button as quickly as possible, and definitely don't average down.

The only recent exception to that rule that I can think of, is Staffline (LON:STAF) - where its accounting problems turned out to be minor, despite a long suspension of its shares.

My…

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Howard Adams

27th Mar '19

Hi

For those watchers of the UK fashion retail space. An interesting insight into the un-listed portion of the sector.

https://www.hl.co.uk/news/2019/3/27/river-island-family-takes-control-of-mint-velvet-in-100m-deal?cid=halDM64858&bid=269373421&e_cti=2135170&e_ct=T&utm_source=AdobeCampaign&utm_medium=email&utm_campaign=EONRM_Daily_newsroom_TYE%20message_27.03.19&theSource=EONRM&Override=1

The article title is - River Island family takes control of Mint Velvet in £100m deal

Regards
Howard

LongValue

Paul made a good point about “Averaging down”. The practice seems to be endemic with smallcap investors. And it's particularly acute in the resource sector. This is only my opinion but I think that many inexperienced investors misunderstand the writings of Warren Buffett. When Buffett suggests buying when others are fearful, he is focusing on extremely well run large businesses where there is a strong likelihood of reversion to the mean. He does not suggest that investors should become even more financially exposed to poorly run small companies that are very loosely regulated.

Broadly speaking, private investors are at the end of the food chain for information. Buying more of a stock after a sharp fall in its price may not be a smart move. It seems to indicate that private investors know more than any other investors when the reality is likely to be the opposite. The people who do know have sold out.

Purely anecdotal, but a quick glance across the bulletin boards tells me that many posters believe that sharp falls in stock prices are arranged by market makers to trigger stop-losses. This may indeed be the case on some occasions. And market makers can hold up to 10% of the stock without notification. They can clearly manipulate prices. But, in general, sharp falls seem to be telling us that the insiders are getting out and maybe we should take note.

Aislabie

I think that Paul may be unduly generous to Cloudcall (LON:CALL) , this is a company which has lost £21.8 mm in the last 7 years (funded by £21mm from frequent placings). The idea, much promoted by the company that UK growth companies do not get market support is - in Cloudcall's case at least - not true.
By the time it gets to the end of 2019 its SALES for the year, after a decade of trading, will barely exceed 50% of the amount invested. It appears to have only one really serious CRM partner and does not even forecast breakeven or profit. In fact statutory Profit or Loss (as opposed to EBITDA, adjusted this and adjusted that) is not mentioned at all.
As Paul acknowledges, the company has made a tradition of missing forecasts on its way to not making any money and my feeling is that the market has bent over backwards to accommodate the company's obsession with its "investment in sales" pitch at the expense of any talk of earnings. A deep and appreciative thank you to shareholders for their forbearance would seem to be in order, from a company that is a tiddler now and will be small for many years yet

Paul Scott

Hi Ramridge,

No, you've got that wrong re CALL results.

Cloudcall (LON:CALL) results today are in line with expectations. That's specifically stated by a couple of analyst reports today. Looks like you may not be comparing apples with apples, which is always the risk with micro caps.

There are updates today from Cenkos and Arden, both of which are available on Research Tree.

The market reaction today doesn't make sense to me. But people don't always have access to broker notes, so may not have known what the expectations were. Everything was explained at the Capital Markets Day, videos of which are available online here - well worth watching to properly understand the upside case.

The main change (as I mentioned in the main article) is that Arden has belatedly factored in increased costs into its 2019 forecasts, which it should have done a few months ago, as that is not new information.

Regards, Paul.

Hi Aislabie,

Well that's certainly a glass half empty view on Cloudcall (LON:CALL) !

It's fair enough, mostly. If you look backwards, then the track record to date has been disappointing. However, investing really isn't about looking backwards, it's about the future - that's how shares are valued.

What I think you're missing, is the upside if you combine rapid (28% in 2018, and set to increase in 2019) revenue growth, at 80% gross margins, of mainly recurring revenue. Put that together, and there's immense operational gearing - which at a certain inflexion point leads to profits exploding upwards.

Frustratingly, the development phase at CALL is taking longer than expected, as they increase development spending, and S&M spend, which masks the strongly rising gross profit.

We're getting towards the end of the development spending phase, in terms of big increases. That should see the company become strongly profitable in a couple of years' time. Bear in mind also, that the company could switch on profits any time it likes, by slashing development spend - but you would then end up with a profitable, but barely growing little company, which nobody wants.

Customers want new features, like SMS messaging, and you just have to have the vision to see that the company's strategy is correct. The deeper you research things, and understand why they're doing what they're doing, then the more it makes sense. This video is excellent in explaining everything.

As mentioned in the main article, this could be a 10-bagger over the next 4 years, if it continues to follow the same growth path as LOOP (which it has done until now).

At £24m mkt cap, what's the downside? It's not going bust, as it can turn on profits any time it likes (at the price of reduced growth). Even if it has to do another small top-up placing, so what? The last one was less than 10% dilution, and was well-supported at 100p.

The only thing that worries me, is if revenue growth really slows down, then the bull case would be wrong. But so far, that's not the case at all. Growth accelerated as 2018 went on, as the new S&M people gradually began to make a difference - obviously there's a time lag between taking on a new sales person, and getting them trained up, then making new sales.

If you remain fixated on the past, then you'll easily miss a very lucrative re-rating, once the market perceives that a positive tipping point has been reached. I've done very well on things like this before. The best one was Indigovision (LON:IND), which 30-bagged after reaching an inflexion point of rapid sales growth combined with high gross margins. Everyone thought it was a terrible company (which historically it had been), but I made £5m on it between 2004-2007, by buying heavily when the shares were bombed out. OK, I lost it all later, but that was just because I didn't sell until the GFC smashed everything up.

Hence why I keep my eyes & ears open for high gross margin growth companies that are under the radar, but beginning to make strong progress. CALL looks promising in that regard. This really could be a 5-10 bagger, you know, given a few more years' sales growth.

Ramridge

Paul- Re. Cloudcall (LON:CALL)

Stockopedia's consensus eps forecast for FY2018 was -6.8p . Reported results are -12.7p .

I am confused. So who is wrong?

Gromley

In this case, I think it is the Stocko consensus eps that is incorrect.

If you look at the consensus forecast for net profit it was - £3.23m and the actual -£3.06m so actually a small beat. So it looks like there is a mismatch there in terms of the number of shares.

rmillaree

Cloudcall (LON:CALL)

Stockopedia's consensus eps forecast for FY2018 was -6.8p . Reported results are -12.7p .
I am confused. So who is wrong?

Note the stocky quoted EPS number you have quoted is the "normalised" one (explained below) - not the reported total. Looking back at the past there has been quite a bit of variability between the two figures 4p diff in 2015 and 8p diff in 2013 - so it looks fairly clear that some material adjustments are regularly made with this share to find the normalised figure. There is nothing obvious to me this year though that would reduce expenses by the full amount (£1.5 mill) .

What is the definition of Diluted Normalized EPS?

Earnings per share (EPS) is the amount of last year's earnings per each outstanding share of a company's stock.
NOTE: This is calculated on a Diluted Normalised basis, i.e. taking into account options and other sources of dilution and any unusual/one-time/special items in order to better reflect underlying results.

Stockopedia explains Diluted Normalized EPS...

EPS is a carefully scrutinized metric that is often used as a barometer of a company's profitability. It is also used as the denominator in the P/E ratio.

MichaelFBS

Bruce

I used to hold Air Partner (LON:AIR) (at the time of the "scandal") and if I remember the isues were non cash in nature but I may be wrong.

They did recover quite substantially and I took the opportunity to sell at 102 because I lost confidence in management. At the moment that was a lucky call as they are now nearly 50% of their 52 week high.

barnetpeter

Delighted with Debenham "offer" today.....but then I first bought Monday morning. Still think around 8p might end up the final offer but not brave enough to keep them all. There is some value in the High Street it seems....certainly MA thinks so.

Got made redundant from Debenhams over 35 years ago; good thing too. I reckon they owed me a few quid for that.

ttjs4

Buffett used to concentrate and average down into small/micro caps early in his career, but he did much more detailed research than the majority of investors do and only invested in situations where he had a high degree of conviction (for example asset plays where he could take control of the company and the asset value was easily calculable with significant margin for error).

Buffett essentially used the scuttlebug technique laid out in Philip Fishers "Common Stocks and Uncommon Profits" to get to know a company inside out. A brief scan of most stock forums will show you that most posters do minimal research before pulling the trigger and then develop significant cognitive biases and become delusional.

jombaston

I mentioned this to Stockopedia some time ago...

If you are going to quote a normalised eps number, for goodness' sake, quote the actual one as well at least for the forecast number. No wonder there is confusion. Many people don't have another source for consensus.

I understand exactly what Paul is saying about Cloudcall (LON:CALL) possibility producing a lot of profit in the future.

However, I have been following this company (and its previous incarnation) for five years. I've been waiting for the P&L and cash burn to turn the corner before investing. In fact, it is always just around the corner.

Looking at the cash burn (about £4m pa. including capitalised R&D and other investment), taking into account the recent placing and cash on the balance sheet I think you would have to be optimistic to suggest that there won't be another cash call in a year's time. Probably best not to wait until they have eaten too far into the debt facility. Will the call be higher or lower than today's price? Who knows? But I'm prepared to wait - I'd pay more if I were confident they really were turning the corner.

Trident

'A brief scan of most stock forums will show you that most posters do minimal research before pulling the trigger and then develop significant cognitive biases and become delusional'

Sounds like you have been looking over my shoulder!

I would add that actually doing a lot of research could also actually lead to cognitive biases and delusions.

Jetman100

Bring back Graham. We might get something complete & on time without excuses

rhomboid1

Hi jetman100

I’d rather idiosyncratic & honest than timely but bland bollox ...but thanks for all your contributions over the years

Edit to add that Graham does sterling work too & i am delighted that we get both of them for the modest subscription price...it’s a struggle not to inadvertently be rude

jonesj

Professional hecklers add nothing of value to other readers, unlike Paul & Graham who do a great job.

Incidentally, the first part of that article was posted when I turned my PC on between 8:00 and 9:00 am, which is pretty good going.

matylda

28th Mar '19

Are you for real?

You clearly have no idea that both authors do this report, in the main, to openly share their often detailed and excellent analysis - Due to their kind nature. Neither of them need the remuneration large or small (I believe small) they receive from Stockopedia.

More wise to let both authors get on with what they both do to their own timetables - Without comment on those timetables. This is the approach sensible fellow investors take.

Rant over!

David Cohen

What has happened to most of the stock comments mentioned at the start of the article?

Garry Hawthron

30th Mar '19

This comment has been moderated

davetparkes

1st Apr '19

these reports are great and very useful - and free..

if the authors work on an ad hoc basis - fine.

i just find frequent excuses / explanations irritating and tiresome.

Small Cap Value Report (Wed 27 Mar 2019) - GOAL, DEB, CALL, SAA, ABDP, ACSO, CHH

Goals Soccer Centres (LON:GOAL)

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Paul Scott

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