Small Cap Value Report (Wed 3 July 2019) - NAR, SOLI, IMO, MLVN, SOS, LOOP, REDD, TPT, WRKS, PURP
Good morning, it's Paul here.
I'm up early today, to finish yesterday's report, so let's start with that.
Firstly, this section was sent in by Graham
Northamber (LON:NAR)
Share price: 46p (-10%)
No. of shares: 27.3 million
Market cap: £12.5 million
Sale of Warehouse Facility for £16.4 million
Graham writes - This is a share that I feel obliged to keep an eye on, as it was once a major holding for me. Aware of the "deep value" in its balance sheet, I attended the AGMs for a few years and, with one or two other shareholders, tried to impress upon the Chairman the logic in releasing that value.
I first invested in it in 2013 when NAV per share was around 81p. NAV had declined every year since 2007, after profitability evaporated. Tech hardware distribution became obsolete, and there was no economic reason to continue these activities. Northamber has been loss-making for almost a decade and has not made a meaningful profit for many years.
Unfortunately, the Chairman (also the majority shareholder) disagreed with our analysis, and ploughed on with the distribution activities.
After three years, I gave up and sold my shares for a tiny profit.
If I had held on to them until today, I would currently be sitting on a >50% gain from my entry price. But I would have had to wait six years for this outcome. The annualised return would have been ok, but nothing to write home about.
This is the problem with deep value investing - you need a catalyst to unlock value, and the catalyst can be totally unpredictable. How could it be predicted that the Chairman would choose to sell the company's warehouse in 2019, rather than 2021 or 2025? There is a massive opportunity cost in leaving your funds locked up for an unknown length of time in a dead business, waiting for payday, rather than simply buying shares in a good business which you can predict will continuously generate profits and shareholder value.
Indeed, even the sale of this warehouse doesn't guarantee that shareholders are destined for a big payday. NAR shares initially jumped much higher from their prior level of 29p, but that excitement has subsided today.
The reason is that the Chairman appears as determined than ever to carry on with distribution activities. Instead of…
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Northamber PLC is a United Kingdom-based company engaged in supplying computer hardware, computer printers and peripheral products, computer telephony products and other electronic transmission equipment. The Company's Wholesale business provides a wholesale function for information technology (IT) products. The Company's Solutions business unit focuses on a consultative approach to IT technologies. Its Retail business unit focuses on providing consumer goods to national retailers. It offers products, such as personal computers, tablets, smart phones and monitors. It offers hard disks, memory cards and optical media. It also offers a range of cables. The Company provides a range of infrastructure solutions. It offers networking and security solutions. It offers software solutions, such as design and publishing, cloud, desktop software, security software, server software and licensing. It also offers home control solutions and conference phones. more »
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Solid State PLC is engaged in manufacturing of electronic equipment and distribution of electronic components and materials. The Company is a manufacturer and specialist design-in distributor to the electronics industry. Its segments are Distribution division and Manufacturing division. The distribution division comprises Solid State Supplies Limited and Ginsbury Electronics Limited. The manufacturing division includes Steatite Limited and Q-Par Angus Limited. Its geographical segments include UK and Non UK. The Company is a supplier of computing technologies, electronic components, antennas, microwave systems, secure communications systems and battery power solutions. It markets its products through brands, including ndura RUGGED and RZ Pressure. It acts as both a distributor to original equipment manufacturers (OEMs) and manufacturer of specialist units to clients with complex requirements. It serves aerospace, environmental, government, oil and gas, and transportation markets. more »
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IMImobile PLC is a cloud communications software and solutions provider. The Company's segments include Europe and Americas (Europe being substantially all to the United Kingdom), India and South East Asia (SEA), and Middle East and Africa (MEA). Its products include IMIconnect, IMIcampaign, IMIdigital, IMIchat, IMIsocial and Textlocal. IMIconnect is an enterprise cloud communications platform enabling information technology (IT) to create and deliver multi-channel digital customer journeys. IMIcampaign is a multi-channel campaign management platform to deliver personalized marketing campaigns in real time. IMIdigital is a content management system for end-to-end delivery of content services across all digital touchpoints. IMIchat is a mobile and social chat application for contact centers. IMIsocial is a built for radio and television broadcasters to develop audience engagement and live programming across mobile, digital and social. Textlocal is a cloud-based messenger platform. more »
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53 Comments on this Article show/hide all
Interesting write up on SOS - I am still not convinced about product being middle to top end, Insaid to my wife I will buy you anything you want but from SOS website and she chose nothing which has never happened before my wife is 34 so maybe she is too young for it and clearly without seeeing items can’t comment on quality but design probably rivals M and S and othe5 similar companies not the likes of Ralph Lauren but then that maybe the market they are aiming at.
Clearly the market knew something was up as share price has been drifting lower so someone has been told the information how see it is that management will competent and on to[ of the world at next trading update and share price will bounce back or else if they do not hit the numbers then it will be a money raising exercise at discounted numbers and the management will be shot to pieces.
I have a small ish holding and as I don’t know the management as well as Paul I have no idea how much I can trust them. I am always worried when people blame the weather for lack of sales as surely the public don’t stop buying clothes if it rains they just need the right products to buy and that is where online sales should be at a huge advantage - BOOHOO does not seem to have suffered the same issues and I doubt Next will, sorry to say but the weather I think is an excuse that is often used although I accept it has a bearing - if the weather on autumn is not what is expected then what happens to s\SOS predictions? I have just sold a hotel as it was too dependent on the BRITISH weather and if we are now saying that fashion brands profitability are down to the weather then for me that makes any fashion brand pretty uninvesatble especially given its erratic nature which is set to continue.
Paul’s points read well and I will keep what I have and remain an interested observer from the sidelines
Sosandar (LON:SOS)
Just read Paul's comments on Sosandar and the readers' useful comments as well.
Key point is "Q1 has seen c.23% year on year revenue growth" followed by mgt's response to Paul's question as "New customer acquisition spending was deliberately dialled down in April & May because the weather was awful"
My view is these numbers are a miss for a startup, based on the following
Firstly, the total revenue number for the full year was £4.4m. In the scheme of things that's a fairly small number, given the size of the UK clothing market and their aspirations. If you are running a start-up you want to hit your numbers and grow fast, especially on such a low base, to prove to the shareholders (and yourself) the proposition has legs.
Appreciate the dimension of cash burn and the thoughtful discipline with holding back cash until the timing is right for max ROI. I get it, makes sense. But again, this is a small startup, you would think if they have a good lineup of designs and they are coming off such a small base, why not just crack on? My experience in a startup (not retail) was we sold all through the holiday periods. Yes, there was noise around lower conversion rates, but so what? We wanted to grow and we were constantly learning from being in market.
Secondly, I have experienced a similar situation personally, heading a marketing team when the CFO wanted to pull back on new customer spending to manage the year's numbers (marketing costs are fully expensed while revenues take time to materialise over the life time value of the customer). This of course meant heated internal discussions !
But while holding back on growth in the short term preserved cash, it slowed down growth of the customer base, dragging out the breakeven point and extending the cash burn phase due to ongoing fixed costs. In the long run it was a bad idea in terms of a five year P&L outlook and this timid approach ended up costing more.
To put this into numbers acquisition cost were around £40 - £80 (depending on channel) and lifetime value was £250 over three years. Cost today Jam tomorrow. In comparison another firm I worked for had plenty of funding so we built up the customer base fast, and it worked because it brought forward our breakeven point. Also it meant the business had scale and value, so when the investor exited they made a good multiple on the sale. So this raises the question is Sasandar making sub-optimal growth decisions from a start-up perspective, because they are inadequately funded?
Lastly, and I do not know retail at all, but if their proposition is unique (smart clothing to ex-young gen women) would have thought weather is less of an issue. Women are still going to work, needing clothes, and the shopping is all on-line. Not an expert here at all, but I view startups as 'new idea let's grow the demand's there'.
So, applause for Sosandar mgt for their cash discipline but as a small startup 23% growth yoy is low.
To be fair it's only one quarter they missed and also they stated June was a record month, so hopefully they can get back on track quickly.
Paul, I try to avoid cluttering up the comments section with "me too" posts, but it gets to the point where it would almost be rude not to say anything. Already another great SVCR (and it's barely lunch time) - not only, but in particular Sosandar (LON:SOS) where you have the sector specialism and contact with the management.
I thought Sosander said at Mello that they would be focusing the marketing more at the most cost-effective times of the year, so am not concerned by the Q1 numbers. The issue is, as you say, the risk of a weak share price coinciding with a funding requirement. I have a starter position but it still feels far too early to get properly involved.
Sosandar (LON:SOS)
Paul - if they are as confident as you make them sound, one would expect them to take good advantage of the languishing share price?
In reply to post #489136
Hello davidjhill
I mean its morphed into a sort of turnaround story relative to previous narrative. Obviously its very different from say a Connect (LON:CNCT)
Maybe they have cash for current year sales target (a double on last year). But that would indicate they have idiosyncratic power as brand and selling entity whereas Q1 suggests they are ordinary go with the flow mortals
My comments on fashion are super on point ;) Its seems quite evident online and through mgt comment that they have struggled to find a vibe to replace their breakout animal print time. If there's not a hot thing and just a brand thing to punt then I refer you back to the paragraph above.
I might buy back...but I'll get it significantly lower is my view.
PS I didn't red thumb just as you disagreed with me!
In reply to post #489011
What are the forecasts?
Really painful drop in Sosandar (LON:SOS) share price - it seems that the outlook line has cost them badly, because there was a lot of things to like elsewhere in the statement otherwise.
If they are still on target for this year, then the co-CEOs could have re-iterated this in more definitive terms, 'we are confident in the outlook for this year' might be a bit mealy mouthed and open to interpretation.
Notable that there are a lot of small buys but all the big value trades have been on the sell side.
In reply to post #489171
Hi Mojo - lol, yes I know you aren't sensitive to that. I don't really care about red thumbs, they are just generally petty if someone is expressing an opinion, but hey ho :) I never red thumb an opposite opinion - it's equally valid to mine. Only time will tell who is right.
A wide ranging debate where we disagree with each other has to be a good thing at improving each of our investment process and thoughts.
Anyway back to Sosandar (LON:SOS) : you may indeed get it lower from a trading perspective. My sense is that the market has been waiting for a reason to be sceptical and it now is. I don't have that much of a position so I will buy more lower if I see a big move down unless trading changes. I have a feeling that the market has misunderstood todays numbers though.
Very good that Paul is writing today's report at all. If I held both LOOP and SOS in size, I doubt I would be capable of concentrating enough on anything but the market drop in the value of my shares, to write coherently on these and other companies.
As it is, Paul has access to the SOS directors and has kindly shared their feedback with readers here.
In reply to post #489241
Agreed. I'd be doing my nut...good job by Paul keeping the show on the road
Hi Paul
Thanks very much for your detailed analysis and comments about Sosandar. I'm glad I didn't wait to hear your views and sold my holding on Monday, after another decline in the price. I didn't like the SR metrics and also the steady decline recently in the price, and lost patience with it. I bought some Mission Marketing instead. I suppose the same principles apply in following momentum stocks higher, don't follow falling momentum stocks lower.
Thanks.
jim.
I note that Paul is planning to get around to the PURP results.
I think it is good that they are pulling out of Australia and USA. They tried to expand too far, too quickly. I note the loss in those two regions is stated as just greater than the total loss. Breakeven next year? Past record makes me skeptical that they will achieve that, but here's hoping.
does anyone know the placing price for £SOS? I've found 15.1p reported but don't have an offical number. As it was a reverse takeover it didn't appear in the IPO data from LSE . Have done a recent study using the LSE published data so interested in its price behaviour relative to the total set. Placing price is a bit of an anchor ( and if it is 15.1p then it held today despite enormous trading volume ).
For those who read Part 1 of the IPO Study , Part 2 is almost done - the missing 131. I'll post it by end of week
Investors behave differently in bull markets than they do in bear markets. That’s a rare heuristic that tends to hold true across markets, and across time.
Regime changes are infrequent, and among the most challenging aspects of being involved in markets, since what worked recently simply stops.
2017 saw a remarkable rise in UK investor risk appetite for high sales growth companies such as Sosandar (LON:SOS) LoopUp (LON:LOOP) & Purplebricks (LON:PURP) . Such a high risk appetite is perhaps typical in a maturing bull market.
Yet many of such companies have subsequently had stumbles in their fortunes & investor risk appetite has been replaced by risk aversion.
It is difficult to see how things reverse again until risk appetite returns. This could be 12-18 months away given that we now face an economic slowdown irrespective of any Brexit outcome.
The Stockpedia algorithm is remarkably consistent in its opinion of such companies - speculative, 'sucker' stocks.
In reply to post #489286
"Good ole" investegate comes to the rescue again ds
15.1p it was!
Just wanted to thank Paul for his review of Sosandar (LON:SOS) (which I hold a minute holding) and Graham for his analysis of Northamber (LON:NAR). Northamber (LON:NAR) is so fascinating I almost want to buy a few because it is so odd!
I don't think that the problem for LoopUp (LON:LOOP) is strictly a macro situation. For instance Zoom (NASDAQ:ZM) which is a competitor in the video conference space for the first quarter of 2020 ( they have a January year-end) had US $122.0 million in revenue up 15% quarter over quarter and are guiding for an increase in revenue of approximately 5 to 6 % for the second quarter. The guidance for the full-year revenue was also increased to $535 to $540 million or an increase of 61 to 62% over 2019. That implies that the growth will accelerate in the second half of the year which makes sense since the second quarter is over the summer period but your mileage may vary.
The most flagrant difference would be in the Customer acquisition cost where Zoom more or less relies on word of mouth for the initial sales impetus. I used to own shares of Loop Up but sold them once I got a hold of Zoom's S1 and saw their numbers. That said the stock is horribly overpriced trading at something like a forward PE of 3020.
In reply to post #489316
thanks Mr G, I have been using Investegate to track down the "missing", great source of archival data
SOS reverting to its placing price having been over 3 times that less than a year ago does fit the trading IPOs model .. although it has already dipped below the placing price...interesting one to watch
Re SOS weather really does impact sales. One hand bad weather shifts sales from physical stores to online which should benefit them. However if you have bought a spring 2/summer phase 1 range that contains lots of dresses, lightweight fabrics, summer prints and it’s 16C and raining people just won’t buy. A lot of clothing sales are need based rather than planning ahead - an emotional purchase.
In reply to post #489166
Hi mbdx7em21
Sosandar (LON:SOS)
Paul - if they are as confident as you make them sound, one would expect them to take good advantage of the languishing share price?
If you're referring to management at SOS, they don't have any money! The CEOs put "everything they had" into the company at start-up. The CFO is quite young, so I doubt has much spare cash either (although am guessing there).
Hence I'm not expecting to see any meaningful Director buys. I'd rather not see token Director buys (which advisers often encourage Directors to do), as it looks fake when companies do that, which is counter-productive in my view.
Regards, Paul.