Small Cap Value Report (Wed 3 July 2019) - NAR, SOLI, IMO, MLVN, SOS, LOOP, REDD, TPT, WRKS, PURP | Paul Scott

3rd Jul '19 by Paul Scott

53 comments 15662 reads

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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Paul Scott

3rd Jul '19

Morning all!

I'm just popping out for some breakfast (as I've been working since 05:40 today!).

I'll do a write-up on Sosandar (LON:SOS) (in which I hold a long position) when I get back. Had a quick chat with mgt this morning, who made some interesting points & answered my questions (which reflect the reader comments above on SOS).

That section should be published here by mid-morning.

Regards, Paul.

thirty fifty twenty,

Please don't post nonsense like that. I am not an insider on any stocks.

I've already spoken to Sosandar (LON:SOS) management, and will write up my thoughts when I've properly read the RNS, and digested everything. I'm not rushing out some ill-considered posts, and nobody should invent any reasons re the timing of any of my reports.

Thanks, Paul.

Hi cowlid,

Yes, results from TheWorks is on my list of things to cover today!

HornBlower

Sosander (LON:SOS) Q1 revenue slow down is going to need a good explanation. a retailer at this growth stage should be growing strongly sequentially not looking at year over year. I understand fashion is strongly seasonal but it requires some fairly heroic assumptions to get to FY revenue of £9.5m with only £1.0m in Q1.

Sold all my position first thing.

Martin C

Looks like the MM's were equally confused with the statement, in not marking SOS down at the open. I was lucky to get out at an average of close to 19.5 and glad that I did as its now 16-17.

Zipmanpeter

Only 2 things clear re Sosandar (LON:SOS) at the moment: Q1 outcome was poor vs trend/expectations and the RNS was inadequate in explaining why (regardless if reasons are good or bad, credible or incredible) !! Clearly a gap vs expectations (in Q1 20 not FY19) has been poorly communicated.

Suspect a high readership / comments day ahead if Paul has already been in contact with Mgt and is promising a write up!! I will be one of them.

I continue to hold, believing in the strategy and not having the constitution to buy or sell 'on the bell'.

davidjhill

Sosandar (LON:SOS) I'm slightly surprised by the reaction on here. Management have answered many of these questions before in both their presentations and Q&A.

1) New customers are directly correlated to marketing spend. Higher spend = higher new customers
2) Acquisition cost (marketing spend per £ revenue gained) is lowest in Q1 and quite considerably so.
3) Thus spending on marketing when (a) it's a seasonal low and (b) has been an uncertain time for the consumer would be irrational unless you were chasing revenue at any price.
4) Thus I expected marketing spend to be heavily reigned in during Q1. This also has a positive impact on cashflow, which many of the comments on here about increasing losses etc completely miss.
5) The key point is that with effectively no marketing Sosandar (LON:SOS) repeat orders were up 123%. That's great because existing customers are loyal and buying more. That has led to a reasonable increase in revenue at good margins for no further acquisition cost..

So cash remains in the bank ready for peak marketing conditions, which in turn leads to a future big jump in new revenues. Repeat customers are also continuing to buy at an accelerated pace increasing those revenues further.

Thus management are happy with forecasts and confident in future as they can predict what the planned marketing spend will bring in terms of revenue and they can see what the existing customer base is re-ordering and how this will unfold.

I'd be interested to see if Pauls chat with management gives answers much along the same lines as I'm less keen on changes in narrative, but from what I've read it appears as if they are happy with that.

thirty fifty twenty

Hi Paul and my apologies if my thoughts + post caused offence.

In my defence I think that I remember that you have in the past, in relation to another stock, said after the event that you had not able to comment as you had been asked if you wanted to participate in a fund raise. If this is not true then I apologise to all for posting 'false news'.

Sosandar (LON:SOS) is on my watchlist primarily because I respect your opinion and analysis and I would try to time any purchase for the maximum benefit. The interpretation of the Q1 outlook today is critical to assess how the market with value £ SOS and if a further fundraising is now more likely. Thus I was genuinely expecting a short update comment from you....

e.g. "good results for 2018, Q1 comment requires some understanding, I will be in touch with mgt and post my thoughts later".
(this is similar to the pre market posts you have been trialling recently)
then it struck me that perhaps you may not be able to write. I appreciate that it would have been better to keep those thoughts to myself especially since I fully support the concept that you should feel empowered to write the SCVP at a timing that suits you.

best wishes and many thanks for the good work

chris rawnsley

Eagerly awaiting Paul's SOS write up. DavidJhill above makes some very pertinent points.

The commentary from the company seems to suggest this level of growth is acceptable for targets. They would not have been allowed from a regulatory standpoint to post 23% and claim everything is good with forecasts at 100%+. They would of had to warn, or at least had drearier language around it.

I do think this will drift towards 10-15p though, even if fears are put to bed based on pure sentiment.

I am a long with SOS.

Trident

I wonder if the recent broad industry comment in the press about slowing online sales is also affecting Sosandar (LON:SOS).

https://www.retailgazette.co.uk/blog/2019/05/online-retail-sales-continues-sluggish-growth-in-april/

https://www.drapersonline.com/news/latest-news/online-clothing-sales-growth-continues-to-slow/7035503.article

....would that you wrote the ( Sosandar (LON:SOS) ) RNS ! This is my expected 2nd order answer from Mgt.

mojomogoz

Sosandar (LON:SOS)

I held a position and sold today. Fortunately, I'd bought some 15-16p...unfortunately I'd topped up in high 20s.

Why sell?

1) Big slowdown in growth
2) Don't like that June has set a record in number of units sold rather than value sold...it has been noticeable that they have promoted discounting frequently in Q1...has the need to clear stock changed the dynamics of who they are in customer eyes
3) DIsclosure is generally not as clear as it could be and does not permit easy comparison. In that light the claim that repeat custom is so much higher YoY is irritating. It is a statistic that is surely much more relevant in a quarter on quarter context and as a percentage of quarterly business
4) Describing a poor sales result as agile is.... (can't say it)
5) On seeing CEO a couple of times now I have had a nagging doubt that she is out of depth leading a corporate. I expect the current co-CEOs to stay but redefine their roles clearly into creative roles.
6) Arbitrarily YoY sales growth of 50% would have pleased me. (see why I bought point 2 below)
7) It is great to have social media and 'brand ambassador ' recognition but a super growth stock needs to have pedal to the metal all the time. It is mgt and growth that leads social media and ambassadors rather than the other way round.
8) They obviously will need to raise cash to market hard and grow. The fact they have 'agilely' halted growth waiting for more opportune moment is wrong groove. The message is that they need a lot more cash to make a lot more impact...rather than a bit of cash to help keep the momentum rolling
9) Apr-June has been a bit unlucky weather wise and that has probably made stock and pushing sales hard. However, I feel that the fading of the animal print craze has left them a bit stylistically stuck and struggling to replace it and still grow significantly (this is very much a dodgy no nothing bloke comment!)

Why I bought

1) A little bit of an experiment in style terms for me as I'm usually a bit more contrary.
2) However, they seemed to have platform and a model that had been road tested by others and with the right product and promotion could grow rapidly. Looking at historical comparisons it is my belief that online company growing revenue at >50% (sometimes hitting big 100 in particularly good moments) is a one that trades on 5-10x current run rate revenues...and finding the right time to buy is extraordinarily difficult and one just needs to take the plunge
3) Tentative evidence that they had a successful and resonant formula

What's going to happen

1) The stock is going to trade down to market cap equals revenue so about 5-8p range
2) They will only be able to raise cash with significant discount and dilution to new lower price
3) Investors are always going to focus on when cash burn ends and profitability comes now. This makes managing the business extraordinarily hard as they really needed to keep the levitational magic of 5-10x revenue to keep the financing sweet such that equity holders were only ever skimmed lightly

4) SOS is here to stay and very probably becomes a recognised brand and perhaps even sizeable. Historic finance and success creates this outcome. But it doesn't achieve that within its current financial shell....the process of changing financial shell could be very messy...staying true and focused to the brand means partnering financially with someone with deeper pockets. Staying true to shareholders means managing cash burn first now and waiting until some good organic non expensive from marketing perspective growth can be achieved and only then tapping for more cash. That's a 2-3 year work through story

This is now a turnaround situation. It may become interesting as a result of that but there is a danger that the turnaround occurs inside a bigger parent...or non public VC backed situation

The problem here is that you would still expect them to hit the >100% revenue growth in every Q, even if a particular Q's revenue was smaller due to seasonal factors..

Here is a crude round numbers example (and i'm ignoring Q on Q sales growth to keep it simple)

Company X's sales by quarter, are 10, 20, 20, 20 and its forecast to double revenue over the year from 70 to 140.
You'd expect the resulting revenues for the following year to be 20, 40, 40, 40 in order to hit the 140.

A 23% revenue growth for Q1 would equate to 12.3, which is well short of the expected 20.

Hi thirty fifty twenty,

Nice response from you, many thanks :-)

I've put up my initial thoughts on Sosandar (LON:SOS) now.

Best wishes, Paul

rmillaree

Sosandar (LON:SOS)
Davidjhill
The key point is that with effectively no marketing Sosandar (LON:SOS) repeat orders were up 123%. That's great because existing customers are loyal and buying more. That has led to a reasonable increase in revenue at good margins for no further acquisition cost..

I would beg to disagree - this stat unless i am wrong is likely to give an out of context pimped up impression of how good repeat orders currently are.

Repeat orders comparisons are comparing repeat orders qe june 2019 with repeat orders qe june 2018.

Note in the 6 months to sep 2018 sales were up 408% - that is such a high % sales increase that most of the orders qe june 18 will have been from new customers - so the repeat order comparison is from such a low base the previous year as to be meaningless.

Note the fact that this stat may appear impressive but isnt that the the repeat order increase for year just finished was 391%. So in 3 months we have gone from 391% to 123% - thats a woeful comparative- although that is misleading slightly in the other direction as we are looking at 12 months period compared to 3 month period - so i am not taking that as a negative - more that both stats arent what they seem to be.

per interims to sep 18

Revenue increased 407% to £1.84m (6 months to 30 September 2017: £0.36m)

spantic

Paul many thanks for you honest comments on Sosander.

Was a holder until just after 8 am and feel somewhat relieved to sell.

I think Paul's overview of Sosandar (LON:SOS) thus far is fair, but it shows that Sosandar (LON:SOS) are not capable of powering through weather issues etc, and therefore vulnerable as all retailers are to the normal bumps on servicing customers. The facts that marketing spend can vary unlike the fixed overheads of bricks and mortar retailers is a plus, but there are no free lunches, and marketing will probably have to be expanded to make up the shortfall, and there is no guarantee that demand will respond, so it is a 'wait and see'.

It could possibly come good strongly at some point, and on that score Paul has obviously got more appetite for risk than me, and hopefully will get the rewards if the best scenario pans out.

Businesses do go through occasional difficulties, and it would be a naive expectation not to have some in the process of growing in a dynamic market. I hope they make the best of the situation.

I sold my interest a while back, after some initial retrenchment of the price but retain a watching brief should it spark to life again.

Wol

Another thank you, Paul, for passing on the results of your discussions with management at Sosandar (LON:SOS) . Very much appreciated. I only have a small toehold in this one given the level of uncertainty. For the moment I will hold and keep monitoring

hi Mojo - I think you've taken a whole series of assumptions and leaps there. It's nothing like a turnaround story.

Pauls comments after speaking to management pretty much exactly mirror my earlier post based on their previous commentary. I prefer that as it is consistent narrative. When they describe "agile" they mean they can turn the marketing taps on/off on an agile basis so that they don't waste money. They have plenty of firepower to hit targets for this year without raising cash and current cash is targeting breakeven. However, that said I do think if they are offered a good deal on a raise they make take some more.
Your comments on fashion are also a bit odd if I may say so. Management are renowned over 20 years at being "on-trend" - I'd say it is unlikely for that to change now.

JohnEustace

The latest from the FCA could impact the likes of Plus 500 if holders are hoping for an upturn in crypto trading to support the share price.

"We are consulting on banning the sale, marketing and distribution of derivatives and exchange traded notes referencing cryptoassets to all retail consumers.
We believe that retail consumers can’t reliably assess the value and risks of derivatives (contracts for difference, futures and options) and exchange traded notes (ETNs) that reference certain cryptoassets. This is due to the:

inherent nature of the underlying assets, which have no reliable basis for valuation
prevalence of market abuse and financial crime (including cyberthefts from cryptoasset platforms) in the secondary market for cryptoassets
extreme volatility in cryptoasset prices movements
inadequate understanding by retail consumers of cryptoassets and the lack of a clear investment need for investment products referencing them
We think these issues will cause retail consumers harm from sudden and unexpected losses if they invest in these products. We estimate a ban could reduce harm by £75m to £234.3m a year for retail investors.

https://www.fca.org.uk/publications/consultation-papers/cp19-22-restricting-sale-retail-clients-investment-products-reference-cryptoassets

Small Cap Value Report (Wed 3 July 2019) - NAR, SOLI, IMO, MLVN, SOS, LOOP, REDD, TPT, WRKS, PURP

Northamber (LON:NAR)

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Paul Scott

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