Small Cap Value Report (Wed 8 Feb 2017) - KWS, DSG, DPP, TLY, FLOW

Wednesday, Feb 08 2017 by

Good morning!

Yesterday's report was late. Here is the link to it - covering 7 companies, to get you started today.

I'll have a quick whizz through today's results & trading updates now. Then I'm off for later today for a week abroad. So Graham will be (hopefully!) covering tomorrow's news. Then, subject to jetlag, it might be a joint effort on Friday. I'm taking my laptop with me, so it's more a question of doing the markets somewhere else, rather than a proper holiday!

Keywords Studios (LON:KWS)

Share price: 609p (up 2.9% today - so far)
No. shares: 54.4m
Market cap: £331.3m

Trading update - for the full year, calendar 2016.

This group describes itself as;

the international technical services provider to the global video games industry

This update reads very well. Figures are given too, which is always helpful. Revenues of E96.6m, and adjusted profit before tax of E14.8m are said to be;

...comfortably ahead of consensus market expectations.  This performance has been driven by strong like-for-like growth, due to the continued growth of the established business as well as the contribution of the eight acquisitions completed during the year.

Eight acquisitions in a year - that is very aggressive expansion, and could possibly carry some risk of over-stretching management? Although the total cash outlay of E20.7m suggests that they are smallish bolt-on acquisitions.

Outlook comments are fairly generic, but sound alright;

Although it's early in 2017, we are therefore confident of making continued progress in the year ahead."

My opinion - the shares have done fantastically well, tripling in price in the last year, so I'm sure the company has a lot of very happy shareholders.

The shares look richly-priced, but performance to date seems to justify that. Also, note that broker forecasts have been steadily rising, so it looks like one of these growth companies which is growing into its high valuation.

I don't really understand its business model, or how to value it, so it's not something I would be interested in. Well done to holders though, so far, so good!

As with all highly rated shares though, if the company does put a foot wrong, then the price would lurch sharply lower. Big ratings don't leave room for disappointment. It's always worth keeping that in the back of one's mind, I find.

Dillistone (LON:DSG)

Share price: 93.8p (down…

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Keywords Studios Plc supplies localization and localization testing services. The Company's segments include Localization Services, which relate to translation and cultural adaptation of in-game text and audio scripts across multiple game platforms and genres; Localization Testing, which involves in testing the linguistic correctness and cultural acceptability of computer games; Audio/Voiceover Services, which relate to the audio production process for computer games and includes script translation, actor selection and talent management through pre-production, recording and post-production; Functional Testing, which relates to quality assurance services provided to game producers to ensure games functions as required; Art Creation Services, which relate to the production of graphical art assets for inclusion in the video game, and Customer Support, which relates to the live operations support services, such as community management, player support and associated services. more »

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Dillistone Group Plc is engaged in the supply of technology solutions and services to the recruitment industry. The Company operates in two divisions: Dillistone Systems and Voyager Software. The Dillistone Systems division specializes in the supply of software and services into executive level recruitment teams. The Voyager Software division's clientele are involved in contingent recruitment, including permanent placement, contract placement and the provision of temporary staff. The Dillistone Systems division offers FileFinder Anywhere suite, which is an executive search database, customer relation management (CRM) system, research tool, report writer and project management solution. The Voyager Software division provides a range of products to all levels of the recruitment market, which include Voyager Infinity, Voyager VDQ!, Voyager Mid-Office Voyager Bureau, Virtual Voyager, Evolve and ISV FastPath. It offers its services to over 2,000 companies in approximately 60 countries. more »

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DP Poland PLC is a United Kingdom-based holding company. The Company, through its wholly owned subsidiary DP Polska S.A., is engaged in the operation of pizza delivery restaurants. DP Polska S.A. has the exclusive master franchise in Poland for pizza delivery brand Domino's Pizza. DP Polska S.A. has the exclusive right to develop and operate and sub-franchise to others the right to develop and operate Domino's Pizza stores in Poland. The Company has approximately 20 Domino's Pizza stores in over five Polish cities, Warsaw, Krakow, Wroclaw, Gdansk and Szczecin, approximately 20 corporately managed and over 10 sub-franchised. more »

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  Is LON:KWS fundamentally strong or weak? Find out More »

40 Comments on this Article show/hide all

ds1980 8th Feb '17 21 of 40

Pretty sure I saw something with him saying he's looking for sites where they can charge £8-10 for a cocktail. That seems remarkably simplistic and cocky. Can't find it now but it did strike a cord.

Found this now :

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VegPatch 8th Feb '17 22 of 40


DPP is a high valuation granted but Dominos has been so successful globally (13k stores globally and growing fast) that you would be crazy to bet against it. Here is my write up from September where the first thing I do is acknowledge its expensive but I remain a holder, and if these LFLs and store roll out keep going then it becomes a very virtuous circle.


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seadoc 9th Feb '17 23 of 40

In reply to post #170833

Thanks VegPatch,

A very full appraisal of DP Poland (LON:DPP) and you make a strong case. I made a similar, but less thorough, study of Domino's Pizza (LON:DOM) 10 yrs ago and came to similar conclusion about being expensive. Obviously I did not have stockrank but see that today this hasa rank of 64 and that it scores on quality (93) rather than value (16).

10 years ago the children were totally smitten with Dominos and when my wife arranged meetings at the house in her role as guide leader the patrol leaders would always choose Dominos for the meal. Soon after the move from AIM to main I made a small investment into the ISA. Over 8 and a bit years that investment is showing a return of over 600% and 28.5% on an annualised basis. I watched the float of DP Poland (LON:DPP) with interest. There was a bit of a hiccup early on, explained as wrong sites chosen, but I think the reality was that DP Poland (LON:DPP) lent the money to the franchisees and some stores had to be taken back in house. I was lucky to pick 9p as my entry point. Over two and a half years I have a return of 80% pa. Your comment on innovation within the corporate culture is very true. 18 months ago there was a Ch4 documentary called "Dominos Pizza: A Slice of Life" Various versions come up on a Google but if you have registered with Ch4 this works:

One of the expenses you have not commented upon is the payment to Domino's Pizza (LON:DOM) for IT licenses. Having watched both companies, I remember that a couple of years ago 2/3 of all new employment in Domino's Pizza (LON:DOM) was in the IT department. I think that is what differentiates it from Revolution Bars (LON:RBG) and Fulham Shore (LON:FUL) Dominos is an IT company with a sideline in pizzas.


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VegPatch 9th Feb '17 24 of 40

In reply to post #170839

Hi Seadoc
Thanks for the background which is really useful. I will watch the documentary.
I have been a professional investor for 20 years and made many mistakes for both my clients and myself. My top mistake is always selling too early, especially when shares look "expensive" yet the business fundamentals remain intact. (However, If the fundamentals are degenerating then feel free to sell)
I vowed to change that a while ago and the results have improved as you tend to benefit from the compounding effect over longer periods.

Like you I looked at Domino's Pizza (LON:DOM) and bought it for my clients. I also did the work on Dominos Pizza Inc (the US parent) which was trading on about 16x PE when I looked at it. They owned both physical shops in the US and have an international franchise business. Given it earns a royalty from every Dominos Pizza sold globally I can only describe myself as a total wally for not seeing the opportunity there. The shares have tripled since.

Your investments in Domino's Pizza (LON:DOM) and DP Poland (LON:DPP) are truly impressive. Well done. Any more good ideas ??

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seadoc 9th Feb '17 25 of 40

In reply to post #170860

"Good ideas?"

Had many, WTN was a play on the price of met coal, made me a fortune, put some into ATC, assume all now lost, but same amount into LoQ at 60p. Pressed by colleagues (who followed me in WTN) about where to put money they made on WTN I suggested LoQ but it had already doubled in price so they felt they had missed the boat. Now called accesso Technology (LON:ACSO) which is now just as overpriced as DP Poland (LON:DPP). If you are a professional do look at Deltex Medical (LON:DEMG) it is still making a loss but priced at only x3 sales of probes. I was a surgeon and if the NHS fulfilled NICE guidelines sales would be £80m which I would value at 12p a share. They actually sell more probes outside UK and that would be about 120p for Europe. USA have more generous guidelines for using probes and worth another 120p a share. Add Auz/NZ/Japan/SA/Brazil/Canada and I get to about £5 a share, not bad as they are for sale at 4p. Still loss making, very much a story share, could go bust and just an idea, my best idea, but perhaps a good one?

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Ramridge 9th Feb '17 26 of 40

Hi seadoc -
I have weaned myself off story stocks ( I think) after some disastrous "investments" / punts over the past two years.
Nevertheless you make a compelling case for me to at least look at Deltex Medical (LON:DEMG)
There is an interesting results presentation on the company's website.
My question is, if their probe is the best thing since you know what and can save the NHS over £200m, why did the sales in the UK decline by some 35%? OK so the NHS administration may not be staffed with the brightest brains in the land, but surely they too can spot a good thing when they see one. Or is it?
I think I will leave this one to those much braver than me.

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seadoc 9th Feb '17 27 of 40

In reply to post #170890


I am happily retired and camping on my boat in NZ, you are well wise to leave this to the brave and even wiser to have spotted the problem. My chance of a bigger boat rests on the administration in the US having a couple more functioning synapses, collectively, than the NHS. Statistically my chances should have been improved as a few non-functioning synapses in the US have been promoted to high office.

But to answer your question, if the old webcasts are still available the NHS CE who extols the virtues of ODM was the CE of the trust in which I worked.

Regards, Seadoc

PS Found a link to BBC Health in 2004 but there was a video:

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peterthegreat 9th Feb '17 28 of 40

In reply to post #170833

Thanks vegpatch for your analysis. My decision to by DPP a couple of years ago was not based on such detailed analysis as yours, but the basis reasoning was similar. In summary it was "Why would the Domino's franchise model not work in Poland?". In my experience the Polish community is quite entrepreneurial so there was a potential reservoir of franchisees and pizzas are enjoyed by Polish people so I thought the model would probably work over there, in which case the rewards for shareholders would be large. Finance figures from early stage companies aren't necessarily very revealing about eventual success, but I also noted that all the figures were moving in the right direction. Whilst I regarded this as a speculative investment (at least compared to my normal investments) I was heartened by the fact that the business model was, to put it mildly, well proven. I would agree with Paul that the company could now be regarded as overvalued but I don't buy or sell based on the share price, but rather on the basis of the underlying business which still seems to be OK so I am happy holding. This is also why I still hold Boohoo. I hope our explanations explain why some investors are happy to hold companies which, based purely on the company's accounts and market valuation, seem to be overvalued.

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janebolacha 9th Feb '17 29 of 40

In reply to post #170887

Seadoc, thanks for your comments on Deltex Medical (LON:DEMG).
I'd appreciate your thoughts on competition and competitors,
besides on any technological redundancy threat.

Many thanks,

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Ramridge 9th Feb '17 30 of 40

In reply to post #170902

Hi seadoc - retired and swanning about on a boat in NZ? Wow. I am green with envy.

This is totally off topic. Yesterday I was surfing the net and you know how you get to places you have no idea how or why. Well I landed on youtube showing a video of former team mates of legendary Jonah Lomu performing at his funeral their final hakka as a tribute. Well I consider myself a hard b***d but I confess I had lumps in my throat a few times.  

Best regards, Ram

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cholertonandrew 9th Feb '17 31 of 40

In reply to post #170887

Hi, I also have been invested in Deltex Medical for a while- about three years. I don't have a medical background but have researched it as carefully as I can. One thing that confuses/concerns me a little is that the evidence base seems to be mixed. Some of the studies investigating the product's effectiveness show strong improvement using the ODM probes e.g. the Spain study and the recent study at St Thomas Hospital vs a comparator (PPWA I think) whilst some other studies seem not to show any improvement. I recently saw a copy of NICE's 'MTG review proposal for Cardio QODM' on the internet which was published last year and was I think sort of a prelude to completing their formal review. It suggested that there might now be less of an opportunity for the ODM probes to bring about a step change in benefits because, I think they were saying, of the introduction of multi faceted enhanced recovery programmes. I've lifted the below quote from the report:

'Enhanced recovery programmes (ERP) have increasingly been adopted as part of perioperative care. ERPs are supported by guidance from The Royal College of Anaesthetists (RCA 2012) and aim to both standardise and improve numerous elements of perioperative care including: patient information, nutrition, mobility and analgesia, in addition to goal-directed fluid therapy. There is consistent, but limited, evidence to show that ERPs reduce length of stay in the NHS (Paton 2014). The EAC concluded that these developments may confound the clinical effects and cost consequences of CardioQ-ODM when compared with standard care over time. Advice from 2 clinical experts sought during the guidance review process agreed with this view and also highlighted that central venous catheters, comparators in the MTG3 recommendations, are no longer routinely used.'

They summarised some of the evidence base in a table with I think a cut off of early 2016 and so excluding the recent Spain and St Thomas Hospital studies. They cited 13 studies of which 5 showed a benefit in terms of fewer complications when using ODM and just two cases of quicker discharge.

Do you have any feel for why some studies show very strong benefits and others don't? The sample sizes were between 40 and 151. Could any difference be made through setup and the way it is used? I also wondered if the use of other enhanced recovery elements negated the benefits in some of these studies? However I think the St Thomas Hospital study was done within the context of an enhanced recovery programme and still showed very strong favourable results for Deltex.

I'm also invested in Rex Bionics. I think you mentioned before that you might visit them and post your thoughts if anyone was interested. I definitely would be. I rate the product and management highly although recognise that there will likely be heavy dilution as they try and commercialise it.


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cholertonandrew 9th Feb '17 32 of 40

In reply to post #170818

I did think his comment about drinkers not noticing was a bit assuming!


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cholertonandrew 9th Feb '17 33 of 40

In reply to post #170785

Hi, I'm not sure about the case with RBG although probably nothing wrong there but I agree with your general comment about it being better to warn upfront. I've noticed a striking difference between companies who reveal any shortfall in profits or revenues in dribs and drabs or perhaps even have to have it forced out of them and those who are upfront and reveal the full nature of the shortfall in one go. I think things will come out anyway and there will be a hit to the share price but I think the most capable and honest management realise that being upfront and transparent will limit the damage and allow them to keep a swathe of shareholders who might otherwise sell as trust is breached.

Not that this is any reflection on RBG. It's one I'll probably do more research on - I know Paul rates it highly.


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seadoc 9th Feb '17 34 of 40

In reply to post #170926


"Do you have any feel for why some studies show very strong benefits and others don't? The sample sizes were between 40 and 151. Could any difference be made through setup and the way it is used? I also wondered if the use of other enhanced recovery elements negated the benefits in some of these studies? However I think the St Thomas Hospital study was done within the context of an enhanced recovery programme and still showed very strong favourable results for Deltex."

I think you have answered your own question. The size of the study matters as does the nature of the study. No evidence of a difference is not the same as evidence of no difference. All studies should be set up with a power calculation at the outset. The power of a statistical test is the probability that the test will reject the null hypothesis when the null hypothesis is false i.e. it will not make a Type II error, or a false negative decision. In simple words, that your study will fail to show a favourable result. This depends on many things, what you measure, how you compare groups, the incidence of the outcome and by how much you wish to influence the outcome. If your procedure has a binary outcome, say death rate of 5% and you think your intervention reduces this by 20% (to 4%) your sample would need to be in hundreds. If you want to show a reduction from 0.5% to 0.4% your sample size is in thousands. In other words to show an improvement in outcome of ODM in fit adults undergoing an appendicectomy the sample size would be thousands. Anything smaller would not show a difference. If you do a smaller study and do not show a difference that is not evidence of no difference, just that the study was badly designed.

Colo-rectal surgery is a good place to look. For two reasons: The complication rate is high and we not only dehydrate these patients by depriving them of fluid but also give them a full clear out of the gut. When ODM was first used it was surprising how much fluid had to be replaced. The outcome was a better result. So a study was done comparing ODM with just giving more fluid, based on the amount needed in first study. These patients did even worse than historical controls, they drowned in the excess fluid.

Another "good" place to look is emergency surgery where, haemodynamically, you do not know whence you start. Likewise vascular surgery where blood loss can be catastrophic. And emergency hip surgery , these patients are frail and are often cancelled on several days, and fluid deprived all day for several days while they wait for an operation. Even small (about 100) studies on these patients will show the benefit of ODM.

"also wondered if the use of other enhanced recovery elements negated the benefits in some of these studies?"

The benefits will not be negated, but may not be shown in the study simply because the reduction in complication rate increases the sample size required to show an identical benefit.

I hope that makes sense. Incidentally the St Thomas study was very well designed and specifically compared ODM with PPWA. I do not think there is any doubt about ODM. In my opinion the poor uptake in NHS has a far more sinister root. Departments are budgeted. If a probe is used there is a cost benefit to the hospital. But if it is not used there is a cost saving in the theatre budget and it is in theatre that the decision to place a probe is made. Sadly this is beyond the reasoning power of NHS middle managers. But it will be (probably already is) crystal clear in the more commercialised health care business in US.



PS Not yet got down to Auckland, I think that will have to wait until I come back in September.

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cig 10th Feb '17 35 of 40

In reply to post #170905

The entrepreneurial aspect may be a negative for DP in Poland: it could mean a lot of competition as many people may be motivated to start their own independent shop (or chain) rather than copy-paste a foreign model and have to pay tribute for the benefit.

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VegPatch 10th Feb '17 36 of 40

In reply to post #170992

There are lots of entrepreneurial people everywhere these days and looking at the mother of entrepreneurialism, the United States, shows that despite huge copy cats it is only a few competitors that get to scale eg Pizza Hut and Dominos Pizza at at least 2x size of their biggest competitors like Pappa Johns (ok, I admit if i had a "sub-scale" pizza business with $600m pa of revenues I wouldnt be on discussion boards debating this stuff with anyone but on a bigger boat than Seadocs!)

Here are the top pizza chains across this great nation, based on gross sales in 2014.
Pizza Hut - $12,900,000,000. ...
Domino's Pizza - $8,000,000,000. ...
Papa John's Pizza - $3,000,000,000. ...
Little Caesars Pizza - $2,900,000,000. ...
Papa Murphy's - $785,630,000. ...
California Pizza Kitchen - $739,000,000. ...
Sbarro - $600,000,000.
Source: Google

I think Seadoc got it right when he explained the sheer investment in IT these days. If you are a 1 or 2 shop competitor how do you begin to compete against Domino's IT eg one tap ordering, IT that shows where your order is, huge online and offline marketing budget.

There will always be competition but history shows globally the big get bigger and Dominate (get it?!) . I am hoping DP Poland (LON:DPP) will be in that bracket.

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seadoc 10th Feb '17 37 of 40


I agree with your reply to cig, but in relation to the boat add that I could not manage anything bigger without a crew! Mind you with a business of $600m I could get the boys to take the boat over the Pacific and fly down in my corporate Lear jet.

I was puzzled by the big trades on Thursday (nearly 6m at offer price but sp stable) but looks like Hargeave Hale have sold on behalf of a client the 2 and a bit million and bought these plus a few more to a total of 3m into the Marlborough fund. Probably some variant of the sell the share and buy a fund on behalf of a client. From experience I have done sell and SIPP and sell and ISA and done the trade at the offer rather than bid price which might explain the anomaly of apparent sales and a robust sp.


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cholertonandrew 11th Feb '17 38 of 40

In reply to post #170974

Hi Seadoc, thanks very much for the reply, that's really helpful. I have kept faith in the Company. I think those recent test results were very powerful and that paper I mentioned (which did initially cause me to wobble a bit on the stock) is only a working paper and it's message did seem to be that ODM may not offer as much of a step change in benefit as previously thought rather than that it did not work. The evidence base it cited also isn't right up to date.

I thought the trial results from Spain and St Thomas Hospital were so good that for the Spain study even if base results could be improved by introducing other aspects of an enhanced recovery programme without ODM, ODM must still likely confer an additional benefit, particularly for the most high risk surgeries. I also like the progress they're making in the US and I think Ewan Phillips does very much believe in what they're doing.

Best regards

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seadoc 12th Feb '17 39 of 40

Coming home next month. Anyone want a Domino's takeaway from NZ?

Seriously this is why Domino's Pizza (LON:DOM) do so well. I had always thought that a basic pizza costs about a pound and this does show the margins available. I see a duo of meaty pizza in Poland is 30zl say £6 and a litre of softie 2zl, 40p so it might be as cheap, and warmer, delivered from Poland!

When I was working, my orthopaedic colleagues would be bribed (£1000 for the day) to work at the w/e to clear the waiting list. Four or five theatres, normally empty, would bash through an all day list. There is no reason to actually stop for lunch but the non-medical staff could insist on a break. They were bribed with a free lunch in theatre and the medical team would arrange delivery of a takeaway, two pizzas/theatre with all the trimming and big bottles fizz. Ordered in advance for delivery at midday with the local manager (literally a stone's throw from front door) it came to about £60 for four theatres (8 pizzas, 8 big bottles etc). They would be left in the insulated bags which were collected by the first passing driver on the early evening run. Makes the mark-up by Revolution Bars (LON:RBG) seem rather tame.

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Delaender 27th Feb '17 40 of 40

Dillistone has grown its sales per share at a rate of 9.4% over the past 10-year window while being predictably profitable. That is pretty impressive. EPS have grown less fast but that is because Earnings have been held back lately due to heavy investment in their key product. This investment cycle is now past while the business keeps growing. That must mean that within the next 12 - 24 month window Earnings will move significantly higher. Add to this a 4% div and a moderate valuation and this is probably one of the surest opportunities out there on London AIM on a 2 year time horizon. The fact the share price is plodding along is probably why it's grown to be so attractive: everybody's gotten bored by this stock, no one is paying attention... That is usually a great time to buy.

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About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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