Small Cap Value Report (Wed 29 August 2018) - GYM, BKS, IQE, JPR, RIC

Wednesday, Aug 29 2018 by

Good morning! 

Thanks for getting all your requests in.

Today I'm planning to look at:


  • Share price: 325p (unch.)
  • No. of shares: 138 million
  • Market cap: £448 million

2018 Interim Results

This is the innovative low-cost gym chain which is currently experiencing rapid growth.

It's one that got away from me, as I was dabbling in the shares below 200p last year. I couldn't quite convince myself to hold on to them, however. I'd be up by nearly 80% if I had.

There could still be a fine opportunity from current levels. So let's take a look at these results.

The company says it is on track to meet market expectations.


  • Revenue +36%. An important figure but the group is expanding its estate and has grown by acquisition. So it's not a "like-for-like" number.
  • EBITDA margin falls to 30%, "reflecting immature estate profile" and the effect of converting gyms from an acquisition it made last year.
  • Adjusted PBT of £7 million.

The adjusted PBT is calculated after adding back in amortisation of acquired intangibles plus exceptional items.

Having looked into it, I think the adjustments aren't terribly out of the ordinary. Note however that exceptional items were pretty big last year (£1.7 million) and are already £1 million in H1 of this year. They are likely to drag on results for as long as The Gym is making acquisitions and lots of changes to its estate. But hopefully these expenses will lead to a lot more profits in the future.

  • Small interim dividend. The company has been raising new equity for growth, so the dividend doesn't really matter. It's all about getting bigger for now, rather than producing an income stream.
  • 6 new gyms and 13 gyms acquired (total: 147). Still targeting 15 to 20 organic openings for 2018 (will need to do better than 6 in H2!)
  • CFO becoming CEO. 

There's no reason for the shares to move anywhere today as things are motoring along as expected.

It's a fine pace of growth. As the CEO points out, the number of sites has increased…

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All my own views. I am not regulated by the FSA. No advice.

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The Gym Group plc is a United Kingdom-based holding company. The Company provides health and fitness facilities. The Company operates approximately 90 gyms across the United Kingdom that are open around the clock. The Company offers gym memberships. Its subsidiaries include The Gym Group Midco1 Limited, The Gym Group Midco2 Limited, The Gym Group Operations Limited and The Gym Limited. more »

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Beeks Financial Cloud Group PLC is a United Kingdom-based provider of custom computer programming company. The Company is focused on providing niche cloud computing and connectivity services for automated trading in futures and forex financial products. The Company’s platform designed for latency sensitive automated trading environments and provides on demand low latency computing resources to its clients through its direct connectivity. The Company offers server infrastructure and connectivity to its clients which enables same day trading of forex and futures on financial exchanges and trading venues. The Company’s products include dedicated server, VPS, and Co-Location. more »

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IQE plc is a United Kingdom-based holding company. The Company is engaged in the research, development and provision of engineering consultancy services to the compound semiconductor industry. The Company's segments include wireless, photonics, Infra Red and CMOS++. The Company is the manufacturer and supplier of Compound Semiconductor wafers or epiwafers using a process called epitaxy. Its photonics business enables a range of end applications, from data communications and advanced optical-fibers, to sensors in consumer and industrial applications. It operates through business units, including wireless, photonics, InfraRed, CPV (advanced solar), power switching, light emitting diodes (LEDs) and advanced electronics. It produces atomically engineered layers of crystalline materials containing a range of semiconductor materials, such as gallium, arsenic, aluminum, indium and phosphorous. The Company has operations in the United States, Asia and Europe. more »

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51 Comments on this Article show/hide all

JohnEustace 29th Aug '18 32 of 51

Is it just me or does Graham vs. Paul on Beeks Financial Cloud (LON:BKS) remind anyone else of Eeyore and Tigger?

I feel inclined to the Tiggerish view on this one, but it's great to see both cases presented.

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sbotting 29th Aug '18 33 of 51

In reply to post #394364

Hi Paul,

Thanks for such a great write up on Beeks Financial Cloud (LON:BKS), I topped up today off the back of the positive results with the hope that over the next few years it will continue to grow at a decent clip given the volatility in the markets should suit their client base.

Their capex over the last couple of years has been consistently more than their depreciation charge. So I guess their investing a lot for future growth, I think in their Mello presentation they the CEO mentioned that for each £1M they spend on infrastructure they get an added £3M capacity of extra turnover.

On an unrelated note, seems like a lot of buying up of Sosandar (LON:SOS) they're up over 30% in the last week off the back of no news, do you have a take on this?

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hawkipa 29th Aug '18 34 of 51

In reply to post #394204

Excellent analysis Leoleo73. Thanks for sharing. I'm a bit puzzled on your 66% profit growth number. I can't seem to solve for this (probably being stupid) but could you share the working? Thanks.

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Gromley 29th Aug '18 35 of 51

Hi Graham,

Very restrained comments on IQE (LON:IQE) I thought - I hope you don't feel brow beaten; I know I had a bit of a moan at you in the past for being IMHO insufficiently questioning of one of the bear notes (which I remain of the view was mischievous) but I certainly wouldn't want you to 'hold back' on your views, they are always valuable to me.

Anyway, it's certainly reasonable to comment on the continuing high level of short interest here, it is certainly food for thought for those considering an investment - personally I've taken the opposite view to significant short positions in the past and come out winning so I don't regard them more as a trigger to review the investment case rather than a red flag; on the other hand I also don't subscribe to the view that they create a pool of forced future buyers that create a "coiled spring" - people like to remember the VW Porsche short squeeze, but there are many more cases where short positions exit calmly and quietly even when wrong.

Anyways, I think the results were fairly well signalled in earlier trading statements so there's not a really an awful amount to discuss at this point. Although there are two points that I would highlight :

  • fanmail questioned the large increase in creditors  - trade payables up to £61m from £36m a year ago or £43m 6 months ago.  It's perhaps disappointing that the company didn't explain this (and maybe this is where the lack of a current CFO is an issue), but I can think of two possible explanations : 1- Some of the capex on new reactors was unpaid at the accounting date, this would add to concerns on their ability to deliver cash-flow and/or 2- they have pre-bought raw materials in preparation for the H2 VCSEL "ramp" (I wish they would not use this term!) that could be construed as bullish.  Personally I would guess at a mix of the two, but its just another puzzle for potential investors to unravel.
  • The second would be the very high apparent tax rate : PBT of £6.6, tax of £2.5m (38%) - this appears to be due to "Other deferred tax movements" of £1.4m. Again no explanation. I'm guessing that this probably a revaluation of US tax credits to reflect the Trump tax reductions and if so that should not really be a cause for concern. I'd rather not have to guess about such things though.

Those questions aside, operationally there is no real news here - I remain "long" on the basis that the earnings trajectory looks to be absolutely still on track, but I accept that even if I am correct, there is likely to be a much smarter time to buy once more compelling evidence is in (hence why I reduced my position earlier in the year). As an investment IQE is hard work  and with the help of Stockopedia I'm very much warming to the idea that there are many "easier" investments to consider, so if I had not already done my homework, I would probably walk on by and ignore IQE completely.



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ttjs4 29th Aug '18 36 of 51

My primary concern with IQE (LON:IQE) is the poor ROC which capital is being deployed at. If the company doesn't improve its ROC beyond its cost of capital in the future, then growth will not add any value and the company will be worth substantially less than what it's currently valued at by the market.

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Graham Neary 29th Aug '18 37 of 51

In reply to post #394444

Hi Gromley, yes you did give me a bit of a hard time previously on IQE (LON:IQE). Thanks for acknowledging! But you're entitled to do that, it goes with the territory of writing publicly about things.

I've never had a strong opinion on the stock, as you probably know. The short attack was interesting for the drama it created and for the puzzle as to whether they had found anything conclusive. I made it clear that I didn't think they had found any damning evidence. In the end, it was a damp squib.

Good luck with IQE. I'm happy on the sidelines. G

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Graham Neary 29th Aug '18 38 of 51

In reply to post #394404

Hi Steve, re: GYM (LON:GYM) many thanks for the input and the points made regarding the lack of daytime use.

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LeoInvestorUK 29th Aug '18 39 of 51

In reply to post #394434

Re: My Beeks Financial Cloud (LON:BKS) 66% profit growth estimate. This is how I should have calculated it:

Stockopedia showed a forecast rolling PE of 23.3 this morning. The Stockopedia help explains:

This is a rolling ratio which means that it weights FY1 and FY2 forecasts depending on how far a company is through its reporting period.

Given the time of year, this should be the same or close to the FY2 i.e. FY2019 forecast.

This implies FY2019 estimated earnings of P / P / E = 80p / 23.3 = 3.43p 

FY2018 earnings: 2.27p

3.43p / 2.27p = 1.51 so a 51% increase.

I can't be certain, but I think I divided the wrong way in my haste. It was only supposed to be a sanity check against the forecast PE. BTW, the current FY2019 estimate is higher than 3.43p.

Blog: LeoInvestorUK
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Graham Ford 29th Aug '18 40 of 51

Interesting views on GYM (LON:GYM) and IQE (LON:IQE).

To me GYM are another example of a retail roll out. Having built a business model that works they were ploughing the cash generated from existing sites into new sites. When the expansion starts to slow the business will throw off impressive amounts of profits and cash. The slight deviation from this is that they have made a couple of acquisitions from weaker competitors that has given them a somewhat different set of numbers this time round. Overall this is very positive. I notice Graham referred to them as the Ryanair of gyms. Perhaps that was because one of the purchases was easyGym. However, I think they are aiming to provide their customers with better customer service than Mr O’Leary. Operating a no contract model they are well aware that they cannot afford to give poor customer service lest their customers walk away. It looks like the low cost part of the gym market is moving towards being dominated by these guys and Pure-gym. I continue to hold.

IQE is a funny beast. I can’t help feeling that if they were spending large sums on marketing, like some internet retailers, rather than on Capex, they would get less stick. To me this is not a story of continuous capex being a continuing drain on cash and profits. Rather it is a spurt in capex to service growth in exciting new markets. In time the capex will moderate and profitability will be good. It should be noted that they have previously stated a payback of around 18 months for each new tool/MOCVD machine. So nothing much wrong with that. Equally their steady increase in installation of these machines shows they are not putting in new kit too far ahead of sales coming in. The projected growth rates in their business buried further down the statement look very good and the confirmation that their wafers for VCSELs for facial recognition etc in Android phone is commencing is great news. Previously people were fixated on the VCSEL sales all being dominated by the iPhone X. Well with Android OEMs now coming on board too that’s no longer a concern.

I ask myself. Do I want a stake in the VCSEL market for facial recognition, augmented reality, LiDAR for autonomous vehicles and fibre optic communications? Do I want a stake in 5G communications? These are great growth markets that IQE are tapping into and the answer is yes I do. IQE have other irons in the fire too. So, although the share price is a roller coaster, I’m hanging on for the longer term and will continue to hold.

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Paul Scott 29th Aug '18 41 of 51

In reply to post #394374

Re IQE (LON:IQE) - it dawned on me, some time ago, that I really don't understand this sector, and hence have no competitive edge, in terms of buying/selling the shares. Hence I've put my profits last year from IQE shares down to little more than good luck, and responding in a timely fashion to a positive trading update at the time.

These days, I can no longer access Peel Hunt research, thanks to the idiocy of MiFID II. I bought IQE mainly because of the bullish PH forecasts. Now that has gone, then the stock doesn't interest me at all.

Also, I think some of the bearish commentary was very useful in helping me change my mind, and selling at higher prices than today -  e.g. Tom Winnifrith pointing out that other companies operate in the same space. So even if IQE has a competitive advantage in the shorter term, then this is likely to be eroded over time. It's also too capex-hungry for my liking.

Good luck to holders, but IQE is not one that I'll be revisiting, for the above reasons.

Regards, Paul.

P.S. I like the way Graham is more willing to say, "I'm neutral" on a share, than me. Also, I find it very interesting to read about how other investors that I respect have responded to results or trading updates. It's amazing how different the interpretations can be from various people.

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matylda 29th Aug '18 42 of 51

Tongue in check (slightly) - If IQE (LON:IQE) was worth double it is now wouldn't Apple have just bought it - GYM (LON:GYM) - Perhaps they will start charging more for a big gym bag than a back-pack :) - Sorry !

Blog: Briefed Up
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Graham Ford 29th Aug '18 43 of 51

In reply to post #394484

Hear what you are saying Paul.

Just on the issue of competition there are very few companies operating at significant scale in the compound semiconductor wafer market for VCSELs with the level of IP that IQE (LON:IQE) have. Hence their comment about their market share. Agree there may be reasons to stay away from this one but the level of competition isn’t one of them. I don’t read TW so cannot comment on other matters he may have raised but I think he has misunderstood about the competition.

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Graham Ford 29th Aug '18 44 of 51

In reply to post #394489

“If IQE (LON:IQE) was worth double it is now wouldn't Apple have just bought it”

Er no, Matylda. Tongue-in-cheek, that would be like a Tesla buying a tyre manufacturer. I.e. not their business.

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matylda 29th Aug '18 45 of 51

In reply to post #394499

Each to their own

Blog: Briefed Up
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smatthews1 29th Aug '18 46 of 51

In reply to post #394314

Couldn't agree more about columns not aligning with the figures, my ocd levels go through the roof here. Glad its not just me!

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Gromley 29th Aug '18 47 of 51

In reply to post #394454

Hi Gromley, yes you did give me a bit of a hard time previously on IQE (LON:IQE). Thanks for acknowledging! But you're entitled to do that, it goes with the territory of writing publicly about things.

Ah  Graham your recall of the event, tells me clearly that I ought to go further than an acknowledgement and give a more direct apology. Whilst I was critical of what you wrote, I did not intend personal criticism of you, although in retrospect I can understand that my wording was poor.

So I apologise unreservedly if I caused offence and I would reiterate the point that in no way would I want you to hold back on your ever valuable views.

At the risk though of appearing churlish, I have to report on something I discovered on searching to remind myself of the chain of events and I cannot therefore recant the substance of my criticism

5-Feb-18 - You reported on a note on IQE by Matthew Earl, who you described as a "respected analyst" - it was the bolded word that I objected to, particularly given that I had evidence that his report contained a material factual error that would be very hard to explain away as an error.

But there is more

7-Feb-18 "Muddy Waters" declared a short position in IQE of  0.93%

8-feb-18 Muddy Waters short position reduced to 0.68%

9-feb-18 Muddy Waters publish their short dossier - mostly rehashing what Matther Earl had written a few days ago.

15-Feb-18 Muddy Waters short position reduced to 0.48%

This one from memory as "shorttracker" does not make it easier to track when positions are closed, but as far as I recall, Muddy Waters closed out the short on 16th or 17th of feb.

What I now discover from looking back is that there is an IQE bear note on the Muddy Waters website dated 2-feb-18 (I extensively looked at the MW website at the time and it was not there then - this is probably provable) authored by Matthew Earl.

As far as I know, there was no disclosure at the time (or since) of any links between Matthew Earl and Carson Block (Muddy Waters).

In intend no direct comment on the character of either of these two individuals, everyone needs to form their own decisions, but if either of these two "gentlemen" ask me the time I will definitely be checking that I still have my wristwatch before I move on.

Sorry to have diverted massively from what was a heat-felt apology to Graham which I'm happy to reiterate.

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bestace 29th Aug '18 48 of 51

In reply to post #394514

The history of the Muddy Waters short positions on IQE can be seen here:

Your memory is pretty accurate - the only difference is that they reduced to 0.48% on 9th Feb, the day after they published their short thesis.

Where are you seeing the 2nd Feb report on the Muddy Waters website? the only relevant page I can see is the 8th Feb one:


which includes this statement:

On February 2nd, a firm called ShadowFall circulated a report criticizing IQE’s accounting for two joint ventures. IQE responded on February 5th, calling the contents of the report “without merit” and “misleading”. Our research has been independent of ShadowFall, ShadowFall’s report does not address the vast majority of the issues with IQE’s accounts we have identified.
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smatthews1 29th Aug '18 49 of 51

My thoughts  and questions on IQE (LON:IQE).

Its clear that the company is spending alot on Capex, whilst some are happy with this I can see why other's wouldn't be, each to their own I suppose. I have to agree with Graham Fords comment about the interpretation of spending heavily on capex to fuel its growth. There is obviously a space the company is growing into, and I find it very re assuring that the company currently doesn't require the banks fuel this, as there was plenty of take up at the last offering. I would also much rather invest in this space than a highly acquisitive company that has ran out of room to grow.

Although this Half year report doesn't look exciting I am happy to see past this, as the top line growth is still very good. Wireless up 11%, Photonics 30% and infrared 11%.

I intrigued by the comment: 

Revenue at constant currency from the largest photonics customer was flat H1 2018 on H1 2017 as inventory from the very successful and aggressive first mass market ramp of VCSEL epiwafers in H2 2017 was consumed in the supply chain. Other photonics customers were up 40% H1 2018 on H1 2017 in constant currency demonstrating the breadth and depth of photonics engagements.

So if this was flat due to their largest customer consuming the inventory levels, would this produce an uplift in revenue for the full year as they have to start producing them again?

Intangible's.  This often causes a divide amongst investors, but If there is anyone with a greater knowledge of IQE's industry as mine is very limited. I would be really keen to understand about their intangible value. Its quite a significant figure on their balance sheet at £116m, and I understand that most investors would write this off from the valuation from a typical stock.

However is this a typical stock given its in the technology sector? As there is proberlya lot of intellectual property to be considered here?  

Inventory. There is another comment  'Transition the company from leading supplier of semiconductor wafers to a global leader in advanced materials'

With the pace of their technology growing so fast, is there a greater chance their inventory could be out of date very quickly and deemed worthless? 

Also for those who have the patience to learn about a small part about their GaN technology. this is worth a read. Even a shift in improving the battery life for the mobile phone market could be enormous. Yet not a great deal is mentioned in their statements about it.



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hawkipa 30th Aug '18 50 of 51

In reply to post #394464

Thanks for clarifying. That is what I got (c51%) but presumed there was something I had missed that was obvious. Cheers. Paul

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Sniggolb 4th Sep '18 51 of 51

I bought into Beeks because I think the CEO was everything that I look for. An understated Glaswegian with a mean eye; a numerate and financially savvy version of Gordon Brown. I thought his presentation was excellent.

Jim Slater used to say that there is only one job for a share price and that is that it has to go up.

Go for it beeks!

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About Graham Neary

Graham Neary

Full-time investor and independent analyst. Editor at Cube.Investments, small-cap writer at Stockopedia. Previously a fixed income analyst in the City and institutional fund manager. I'm a CFA charterholder and have the Investment Management Certificate and STA Diploma in Technical Analysis for good measure. When I'm not talking about finance, I enjoy recreational poker, chess and Mandarin Chinese. more »


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