Small Cap Value Report (Wed 27 Nov 2019) - SOS, SCS, ABDP, OTB, WATR

27th Nov '19 by Paul Scott

25 comments 10853 reads

Good morning, it's Paul here.

Early on, I'll be focusing on the interim results from Sosandar (LON:SOS) (in which I hold a long position). I've got a telecon booked in with mgt early on. I'm expecting to see a big increase in marketing spend, fuelled by the recent £7m placing, and an acceleration in sales growth (after a slowish Spring/Summer season). Seeing as these are already known factors, then the key thing will be the current trading statement. If Autumn/Winter sales are going well, then the recent share price recovery could continue.

Estimated timings - as always, it depends on what newsflow there is. My intention is to start early, and be finished by 3pm. Update at 15:34 - apologies, I nodded off after lunch (trainee pensioner LOL!). Am back at work now, so I'll be finished here by 5pm. Update at 17:00 - today's report is now finished.

On my agenda today;

Sosandar (LON:SOS) - interim results & a quick call with management

SCS (LON:SCS) - AGM trading update

Ab Dynamics (LON:ABDP) - results headline figures look fantastic, so I'll report on this, even though it's moved above my usual upper mkt cap limit

OnTheBeach (OTB) - preliminary results FY 09/2019

Water Intelligence (LON:WATR) - upbeat-sounding trading update

Rejects

Filtronic (LON:FTC) - in line. Not very interesting, so I won't report on this one.

Grafenia (LON:GRA) - only £8m market cap, and headline figures look weak - I'm not convinced this company has a viable business model. Therefore not of interest.

Appreciate (LON:APP) - interim results out today are not very important, as it has a strong H2 trading bias. Trading outlook unchanged, so nothing for me to report on.

Sosandar (LON:SOS)

Share price: 25.75p (up 3% today, at 08:09)
No. shares: 162.9m
Market cap: £41.9m

(at the time of writing, I hold a long position in this share)

Interim results

Sosandar PLC (AIM: SOS), the online women's fashion brand, is pleased…

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ken mitchell

27th Nov '19

Also looking forward to Paul’s update on Sosander’s results. Hope it helps confirm that they are very encouraging.

Recent performance suggests pace is accelerating, with £1 million revenues (POST returns) in October and November set to exceed that.

Also like the bit at the start of the Outlook statement....”extremely confident about future prospects.”.

A slight beef is that they are “on track to meeting Management expectations for the year.,” but so far are tending not to exceed Management expectations as BOO did time and again after that early profits warning. BOO has continued to do that ever since. Perhaps when SOS first do that will be when the share price really accelerates too.

It looks as though it will be a slower journey than it was for BOO, but based on progress so far could be equally rewarding for investors prepared to be patient.

So many these days want instant success and with little interest in seeing an ambitious small Company, with it seems very shrewd Management, progress to becoming a potentially very big and successful online retailer.

I’ve held SOS for a good while and very hopeful it could be as rewarding as BOO in time. Meanwhile as long as newsflow is OK SOS looks a great medium term lockaway and perhaps as big a winner as BOO.

(Thanks for your outstanding updates here on BOO Paul, from when they issued that early profits warning, when I bought and it 8 bagged. AND it proved a mistake selling as fast growth and share price continues).

MiserableJacktPotato

iirc Boo came to market 10x the cap of SOS and was already profitable - not really realistic to compare the two companies at this stage imo.

Some encouraging signs from OnTheBeach (OTB) today after a difficult spell?

Demise of Thomas Cook was a short term negative but they say provides a longer term opportunity with reduced capacity and pricing pressures easing.

And “Failure of TCG provides unprecedented opportunity in medium term to gain market share.”

And already search demand stronger since TCG failure, and also “significant increase in flight pricing.”

The strong finish to 2019 perhaps bodes well, as does renewed appetite for East Med and Turkey, and strengthening early sales for 2020.

.Another plus is the £ strengthening....for now. Not hedging £ proved a mistake . Will they in future?

grb

Today's profit warning from Stm (LON:STM) (which I hold) has taken 25-30% off the price so far - it's usually fairly illiquid which won't have helped. I'm thinking that this might prove a good entry point, and will think about adding some. Net cash is now a very significant proportion of the market cap. Scores highly on value and badly on momentum. Good quality scores make it a classic contrarian stock.

Zipmanpeter

RE Sosandar (LON:SOS) - IMHO Key points are :

rapidly increasing scale (from both new customers AND importantly re-orders) on much wider product lines (now >1000skus) is decreasing risk; previously seemed a bit of a one-trick, leopard-print dress, pony (to mix my animal metaphors!) but no longer
sustainable gross margin margin of 54% at a good ave order value of > £97.
cash on hand (£6.9Mn) to fund Marketing of (?)£3Mn pa plus working capital for new skus. Over time, this separate Sosandar (LON:SOS) from the millions of other online fashion products & builds a valuable brand. They point out only rising scale has enabled them go to TV ads, creating a virtuous circle of awareness, revenues and re-investment.

Put together, this suggests growing to > £20-30Mn pa should be achievable within a couple of years at which point this will become a very good investment.

We should not need or expect Sosandar to become anything like as big as BooHoo or ASOS to be made very happy because we are taking a lot of risk but getting in the ground floor. I hold but expect to have to hold for another 3 years yet.

Re Appreciate (LON:APP) - I think worth commenting that whilst the trading outlook is unchanged, the RISK around the second half looks reduced. This is valuable to me for a business trying to deliver a significant transformation and modernisation plan.

I see Appreciate (LON:APP) as having delivered on several rather dull executional and strategic milestones this H1 (eg move to new office, revamping & separating Christmas Saving product, getting more, relevant brands signed up for the giftcard business. Also, long flagged new product "Gifti" is getting a soft launch pre-Xmas. Actually, I like this as new concepts often need some refining post launch; better to learn cheap and iterate. Will be ready to push by Q1.

Overall, as Graham has said does not need much to go right to suddenly look a lot better business - with >6% divis whilst we wait.

Boon

Not quite sure if Giftli will be a hit product.

It looks like the launch and marketing isn't being handled very well. No domain name registered yet, multiple other products/websites named the same. The sneak peak video on YouTube looks a bit amateurish (overloading emojis into the video is meant to appeal to millenials??).

Despite that, I do like the progress in the main business that Appreciate (LON:APP) has achieved in H1. So hope Giftli doesn't sidetrack too much management attention and resources.

abtan

Sosandar (LON:SOS)

I continue to be perplexed by Sosandar (LON:SOS) .

On the one hand there is no denying the stellar growth and margins being achieved. Those alone make a compelling argument to jump in now.

However, there are a few things I continue to struggle with:

Engagement on Instagram doesn't seem to have moved much over the last year; it's still the same celebs drawing the same likes. If you hover over each post on their instagram tagged page (link) you'll notice the posts with large numbers of likes and if you go back far enough you will see that it's generally the same 5-10 celebs generating those posts.
I did a backlink check to see which domains are pointing to the sosandar website (link) in order to scope out the strength of those links and therefore the likelihood of increased future web traffic.

There are some big names pointing to the sosandar domain, mainly the tabloids, however, the number 1 website by Page Score (ie the most powerful URL) is clipperlogistics, and the first blog that appears does not seem to be a big name (annelibush.com) and relates to a post from 2017.

I realise that sosandar is relatively small, but I'm struggling to understand where they are getting their online referral traffic from.
My last niggling doubt is on New Customers acquired in H1.

Today was the first time that this metric has not been published. I'm always suspicious when figures are omitted; it makes me think that the company are hiding something.

Watching on the sidelines for now.

Cheers

SCS (LON:SCS)

I completely agree with your analysis Paul.

I was a rather strong holder until recently, when I realised how much a 7% drop in revenue will have on operating profit; by my estimates a decrease from £14m to £7m.

Operating cash flow, less working capital, less CAPEX = £15m in 2018-19

Assuming the 7% drop in revenue continues, this figure could quite rapidly drop to £8m

This would barely cover the dividend payment of c £7m, which therefore looks at risk of being cut.

I remain on the sidelines for now.

schomosport

Under SCS: " If you take the time to read the (short) Political Declaration which the UK & EU have agreed, both sides basically want to keep everything pretty much the same as it is now."

No they don't! Easily shown to be something that's going to be entirely different in practice. Not the place for a Brexit discussion so I will stop here.

Please do however keep the SCV reports coming. All the best.

iwright7

Prepahps worth mentioning that mid-cap Softcat (LON:SCT) issued a +ve Q1 Trading update today....

"We've performed well during Q1 of our new financial year. Customer numbers and gross profit per customer were both up on the prior period, and we again saw growth across all areas of technology and customer segments. We also successfully opened our new office in Birmingham in September and are excited about the contribution it can make over the long term. While it is still early in our new financial year, I'm confident we will achieve the goals we have set ourselves for 2020."

Trident

Re: Victoria (LON:VCP)

They released interim results yesterday. Frankly trying to make sense of its reported P&L gave me a headache, so had a look a look at its cashflow. Its says cashflow has improved, although I note in its cashflow it is adjusting upwards for amortisation of IT software for the period, which would improve comparatives. I always thought amortisation was a non-cash item, so no doubt in my ignorance I have discounted this, and doubt that real cashflow has improved.

I guess it makes sense to put its financing on a longer term footing by way of bond financing, albeit these have been done on worse interest terms than previous Bank debt.

Am I wrong to worry who is holding those bonds? There was no disclosure of this, but I guess it will appear in the notes of the full years accounts in due course.

Paul Scott

Hi Trident,

Yes I agree - I started looking at results from Victoria (LON:VCP) yesterday, and rather quickly developed a mild headache, so decided to abandon my analysis.

Does it matter who is holding the bonds? They don't have covenants, so it was a clean issue, not a distressed situation.

I much prefer more secure bond funding, to bank debt. Although even allowing for that, the balance sheet looks stretched to me, with too much debt. I've discussed that with the company, who disagree with me, they think the level of debt is fine, because of the cash generative nature of their businesses.

Regards, Paul.

Mr Flabby

Dear Paul

I am unpressed with the magnanimity of your boss as you seem to be ‘biting the hand that feeds you’ as you have today pointed out a particularly egregious example of the shortcomings in the StockRank score. Sosandar (LON:SOS) receives a low score and is considered investable, whereas Scs (LON:SCS) receives a high score but you effectively consider it to be too risky.

As are rather anxious and newish investor, whilst I understand your reasoning: I am not requesting blind obedience to the Stockopedia Gods, however perhaps an official ‘Stockopedia’ view could also be put forward. This would allow another viewpoint to help understand the share universe in which Stockopedia works and when it does not. Alternatively this criticism of the StockRank system could be used by the developers to place, say, a ‘confidence’ factor in the StockReport.

This is not a plea to change your reporting style - I very much enjoy reading your reports – without your personal view theses would be dull indeed.

timarr

Alternatively this criticism of the StockRank system could be used by the developers to place, say, a ‘confidence’ factor in the StockReport.

I think this is a misunderstanding of Stockranks. They're statistical and high ranks will result in some outperformance across a portfolio - but they say nothing about individual stocks, although it's often interesting to analyse why a stock has a particular rank. There is, therefore, no inconsistency at all in Paul taking one view of a stock and the ranks taking another.

So, for example, stocks that have similar attributes to Sosandar (LON:SOS) will on average tend to do badly. Similarly stocks with attributes like those of Scs (LON:SCS) will on average tend to do well. But a specific ranking says nothing about how Scs (LON:SCS) or Sosandar (LON:SOS) will perform in future.

WDWombat

Purely for the record Simon Thompson of the IC has put this down as a sell today having backed it to date. Crudely new business has been slower than expected and Finncap (you can get their stuff if you register) have modified forward estimates fairly dramatically. You may be aware of this but my view is that in general ST is excellent despite some catty comments.

Nebraska1977

Paul, I’ve read the bios of the management team at Sosandar and they look pretty good but can you set out in more detail why you are so impressed? At this stage, a huge part of investing in this share is a bet on the mgmt team so a bit more colour would be appreciated. Thanks.

Hi MrFlabby,

Sorry, but you've got completely the wrong end of the stick there.

Maybe read up a bit on the StockRank system, to get a better understanding of it?

https://help.stockopedia.com/product-guide/stockranks/the-stockranks

It's a terrific system, which has delivered excellent multi-year results. Quite how you came to your conclusions, is a complete mystery!

Paul.

melody9999

Comparing DTG and OTB is like comparing chalk and cheese. One is a supplier, the other a distributor. One benefits from the demise of a major competitor, the other suffers from a reduction in supply. (a possible benefit to OTB evaporated when Hays Travel bought the TCG shops)

If I was DTG now, I would be playing hard ball on the commission levels I pay OTB - after all OTB are short of flights / holidays available to them having placed a lot of business through TCG - hence the comment about search volumes increasing (which just increases OTB overheads)

Disc: I am long DTG and was short OTB but closed out - think the market gets the benefit to DTG but not sure it sees the full implications for OTB.

30th Nov '19

I suppose it hinges on me being a CFO in the fashion retail sector between 1993-2002. You pick up a lot of knowledge when you control the finances of a business, as in any sector, and you just learn what type of people are bullshi#@ers, and which ones know what they're talking about.

Hence I can spot people who know what they're doing in my sector (BOO, NXT, SOS), and avoid clueless idiots (KOOV)

Small Cap Value Report (Wed 27 Nov 2019) - SOS, SCS, ABDP, OTB, WATR

Sosandar (LON:SOS)

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Paul Scott

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