Small Cap Value Report (Weds 24 March 2021) - HAT, QTX, TUNG, BMY, SPE, TPFG, CTO

24th Mar '21 by Paul Scott

89 comments 11139 reads

Good morning, it’s Paul & Jack here with the SCVR for Wednesday.

Timing - today's report is now finished.

Agenda -

Paul -

H & T (LON:HAT) - FY 12/2020 results. Resilient, but lots of moving parts. Bullet-proof balance sheet. Tricky to value.

Quartix Holdings (LON:QTX) - AGM trading update sounds upbeat, but valuation now looks sky-high

Tungsten (LON:TUNG) - loses a major client, but says pipeline is strong. Its track record is poor.

Bloomsbury Publishing (LON:BMY) - another ahead of expectations update. I try to work out what upgraded EPS might be.

Sopheon (LON:SPE) - review of FY 12/2020 results. Interesting company, maybe a bit too pricey given sluggish growth? (covid, and SaaS transition blamed)

Jack -

Property Franchise (LON:TPFG) - resilient results and an acquisition from this sensible estate agency franchising group.

Tclarke (LON:CTO) - improving outlook and ambitious 3Y revenue growth target from this low margin, low multiple engineering and services group.

Let’s start with some comments on a few of yesterday’s backlog items;

£H&T

286p (down 3% yesterday) - mkt cap £114m

Preliminary results for year ended 31 Dec 2020

There are lots of moving parts in these accounts from the UK's largest pawnbrokers. Reading through the commentary, performance in some activities were impacted by covid lockdowns, but the high price of gold greatly boosted profits from gold scrappage. Retail sales of jewellery have been strong. Demand for forex has been weak, due to reduced international travel. There’s also the uncertainty over the ongoing FCA review of High-Cost Short Term Loans, with the outcome now delayed to Q2 of 2021.

Taxpayer support has included furlough funding, and business rates relief, boosting “other income” by £3.8m. It looks like the company is pocketing these, rather than repaying them to the taxpayer.

Considering all the disruption from covid lockdowns, the overall result for FY 12/2020 looks resilient -

Profit before tax down 22% to £15.6m

Diluted EPS down 27% to 32.1p - giving a PER of 8.9 - which looks cheap

Divis of 8.5p (up 81% on 2019) - yielding 3.0% and with clear scope to raise divis in future, due to the strong balance sheet.

Receivables loan books are down sharply though, which means future profits are also likely to fall,…

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rmillaree

24th Mar '21

thanks for trying to educate me one_eyed_jack
Strewth - struggling to make much sense of that though my over 50 brain cells are popping :)
Perhaps the NFT fad is already over - Funko started the day at $18.30 - peaked at $24.40 and is now back to $19.74 - hey ho it was fun riding the NFT bandwagon while it lasted - whatever it was.

timarr

Hi one_eyed_jacks

The hype about NFT's is all around nonsense opportunities - essentially putting digital items on the blockchain. So you can claim ownership of Jack Dorsey's first tweet, for instance.

The real opportunity is in putting physical items on the blockchain - which is what the OP sounds like he's talking about. Once you can uniquely identify an item that is otherwise indistinuishable from any other all sorts of opportunities open up. And that's before we consider tokenization of shipping containers or, heaven forfend, shares.

Tokenization is coming, figuring out how to invest in it is the immediate challenge.

Logical David

Hi Tim / timarr,

A basic example of a NFT (non fungible token) is to imagine a painting, such as, say the Mona Lisa. There are umpteen copies around the world of this painting but only one is the original oil painting by Leonardo da Vinci back in 1503. When something has a NFT token attached to it then it means it is the only true genuine original.

I don't know if you watch the TV programme CLICK on BBC NEWS each weekend (channel 107 HD or 231 SD) but two weeks ago they brilliantly explained what NFTs are and show some examples. If you visit BBC iPlayer, search for CLICK and scroll down to the programme episode WHEN ART GOES DIGITAL, Laura Lewington and Spencer Kelly explain NFTs very well.

Cheers David.

Richard Goodwin

Edit: better answer below!

Hi Logical David

A basic example of a NFT (non fungible token) is to imagine a painting, such as, say the Mona Lisa.

I know, I do this for a living :-)

The Mona Lisa is the classic example always given - but you can't just attach a token. It works something like this ...

1. I prove I own the Mona Lisa (a process that will presumably involve lots of lawyers).

2. An irrepudiadable identifier of the Mona Lisa is created - imagine a unique algorithim to generate a spectroscopic analysis of the painting that ends up as a string of digits. This can be the token.

3. The token is added to the Priceless Artworks Blockchain and I am granted ownership of the token (in the same way I have ownership of a Bitcoin).

Someone tries to sell the Mona Lisa. The buyer firstly scans the painting to regenerate the identifier - the token - and they can then compare this with the token held on the Priceless Artworks Blockchain.

If the token matches then they fork out several hundred million to buy the ownership - but this won't work unless I actually have the keys to transfer the ownership of the artwork in question.

The important thing is that the actual unique real-world item can be linked to a digital identifier - the token. With something like the Mona Lisa you need some kind of non-invasive process, with something like a Gucci handbag you need some kind of chemical stamp (since all Gucci handbags of a specific type will be otherwise indistinguishable).

So, in future, the dress that was once owned by Kim Kardashian will be worth more than the identical dress owned by my daughter. Such is progress.

Paul Scott

Hi mojo,

Thanks for the link on MMT, I'll listen at the weekend.

This is such a fascinating area, and I think you hit the nail on the head here in particular, when you said;

I'm always an ideological agnostic as my view is we never truly understand or place the pieces together well enough in advance

I agree completely. We have an army of experts, all talking about the future in such strident certainty, yet practically all of them are practically always wrong! Much better I think to admit that we have no idea what the future holds, and to consider all options.

I'm so glad I read the mind-bending Stephanie Kelton book. I can see a lot of flaws in it, but you can't argue with reality - which is why I read it - that something clearly has changed, at least for now, and as you correctly point out, conventional wisdom doesn't work at the moment.

I find it all fascinating, and love reading, listening & discussing these macro topics, whilst admitting freely that my opinions are no better than anyone else's! We'll probably all be wrong in the long run.

Best wishes, Paul.

FreakNomad

The real opportunity is in putting physical items on the blockchain - which is what the OP sounds like he's talking about. Once you can uniquely identify an item that is otherwise indistinuishable from any other all sorts of opportunities open up.

We already have this. It's the Land Registry. Every piece of land is uniquely identifiable and you can go to the Registry to find out who owns it and why they have good title.

Moving this to a distributed database seems like a recipe for chaos. For ownership of paintings and antiques I can't see that shifting certificates of provence onto some sort of distributed database, whether you call it a blockchain or something else solves any problems and probably creates new ones.

Gromley

Hi Tim / timarr,

A basic example of a NFT (non fungible token) is to imagine a painting, such as, say the Mona Lisa. There are umpteen copies around the world of this painting but only one is the original oil painting by Leonardo da Vinci back in 1503. When something has a NFT token attached to it then it means it is the only true genuine original.

I don't know if you watch the TV programme CLICK on BBC NEWS each weekend (channel 107 HD or 231 SD) but two weeks ago they brilliantly explained what NFTs are and show some examples. If you visit BBC iPlayer, search for CLICK and scroll down to the programme episode WHEN ART GOES DIGITAL, Laura Lewington and Spencer Kelly explain NFTs very well.

Cheers David.

I liked Timarr's response to this although I would simplify it; if you have to "attach" the NFT identifier to the original item - presumably this means something like a sticker, tattoo or engraving - can those labels not be forged? Or can they not be removed or attached to a different object?

NFTS are AFAICS a total nonsense when it comes to physical items, they are no better (perhaps worse) than provence established through public sales.

They maybe have some value in terms of 'digital assets'; like the digital image that was recently 'sold'. AFAIK, you can view that image online, you can even print it off and stick it on your wall (although that might be "technically" illegal). You are probably not 'allowed' to repost it online, but you could link to the owners website where they display it.

I cannot really see here how the "ownership rights" gained from ownership of the NFT amount to more than bragging rights "I own this".

I have seen all of the BBCClick stuff on this, but I think this is one of those cases where Spencer and the crew have been somewhat blinded by the shinies they are presented with.

I may though just have genuinely not 'got' it, so I am happy to be educated.

Gostevie

25th Mar '21

This comment has been moderated

If you have to "attach" the NFT identifier to the original item - presumably this means something like a sticker, tattoo or engraving - can those labels not be forged? Or can they not be removed or attached to a different object?

Labels are sometimes used but that's not really the best way of doing this. With new goods there are methods by which you can embed a unique identifier into the material. Something like this:

https://pufin.id/technology/

Don't be misled by the term "label" - these identifiers can be added to paper (for instance) but can also be integrated into physical material as well. This is just one example of identifiers which, to all practical purposes, are unfakeable. Never, say never, of course, but if the cost of faking the identifier is greater than the value of the underlying asset then attackers will go elsewhere.

With something like the Mona Lisa that's more tricky since we don't really want to modify the artwork, so performing a scan of some kind to produce a unique signature is more likely. Those, however, potentially can be faked so it would still need ownership of the asset, ownership of the token and expert provenance checking to confirm the authenticity. It would be virtually impossible to make a believable fake artwork that generated the same signature.

There are lots of applications of the technology. Shipping containers, for instance - lots of them are lost, and ownership can get switched. Tracking them and restoring ownership is a business in its own right and generates lots of cross-border friction. Heaven knows, we could do with a bit less of that right now.

On digital assets - there are digital things where NFTs are useful - shares for instance. Stock exchanges are looking at how to use the technology to reduce the cost of ownership and speed of settlement. This is a good entry point to the world of tradeable security tokens:

https://thetokenizer.io/2021/0...

People coming to this afresh tend to confuse this with cryptocurrencies - but it's not the same. WIth cryptos the token is the asset, with security tokens the token represents the asset.

NFTs are the light entertainment end of a huge industry, which it's well worth acquainting ourselves with as it's going to make a lot of things tradeable that previously weren't. Once you can put the Mona Lisa on the blockchain you can fractionalise ownership and then trade those fractions.

Or you can go to it to get someone else's property transferred to yourself.

A Freedom of Information request to the Land Registry has shown that there have been 678 claims for property fraud over the last 14 years.

https://propertyindustryeye.co...

And, indeed, the Land Registry is looking at using blockchain:

https://hmlandregistry.blog.go...

As they say:

We believe that blockchain technology could enable:

speedier property transactions
more trust in the transaction
higher levels of security
increased transparency for participants in the transaction

Top tip - don't pay your mortgage off, because if you have one then the LR need to check with the mortgagee before transferring title. If you own outright then sign up for the notification process:

https://propertyalert.landregi...

All a bit 20th century though.

mojomogoz

Hi Gostevie

You've said similar to me before....and I have pointed out that english is my first language...but maybe I'm just bad at it (and I tend to write quick and unedited/unconstrained)

So, you're comment is bizarre...but I haven't red flagged you!

Ciao for now

Yes, its a funny business....we'll be terribly wrong and then a few years later we'll always have thought it obvious.

I try to think of paths of least resistance combined with 'restraints' that influence where things can't easily go. Of course, this wont see the truly big occasional surprise

speedier property transactions
more trust in the transaction
higher levels of security

increased transparency for participants in the transaction

As has been said before "if you can replace 'blockchain' with 'database' then what you're doing is boring"

The description of what the LR is doing suggests they plan to manage workflow through a centralised database. That might make it a bit more efficient, but there is nothing 'blockchain-y' about it. The point of bitcoin and monero is there is no centralised control and transactions are booked through a trust-less consensus.

In relation to land transfers, every property is unique with unique problems. It seems particularly unsuited to a blockchain type solution.

And I've said the same many time to my clients. Most blockchain opportunities would be better fulfilled with a BGD (Bloody Great Database).

However, where you have tradeable assets then there may be an opportunity to use some form of blockchain. LR is a reasonable fit - it removes the need for the risky middlemen (aka the LR), ownership is a matter of public record, transferring title is better done by a secure digital transaction than an insecure paper one (even if the latter is recorded in a database as it is now) and it crushes the settlement period (which with the LR can take weeks).

For LR there's no need to have a distributed ledger, other than for implicit resilence, and the consensus mechanism will be a combination of the existing title owner and an approved third-party (probably their solicitor) approving the transfer to the new title owner certified by their own third-party (ditto). Property fraud has bankrupted law firms, so it's an area of interest to them.

In this case the difference between databases and blockchain is that in the former a transaction occurs outside of the database and is recorded on it, while with a blockchain the transaction both occurs on the blockchain and is recorded on it. In other cases, where you already have a secure digital transaction going on (e.g. a credit card payment) then the business case for moving to blockchain doesn't exist.

It's horses for courses, but moving the Land Registry to a blockchain looks like the cheapest and quickest way of digitising the service.

Funko and NTF's
thanks for the headsup here peeps intersting stuff - seems the mere mention of NFT's is similar to bitcoin in that it immediately makes your company value increase by 20% - shame i didn't sell on the temporrary spike - i have now tracked down the specific comments that were made (i think they were informal rather than being included in an official release)

All i can't presume here is that practicably speaking its some clever wheeze probably akin to the panini stickers back in the day where some items are rare and the rarity creates extra sales - i think the company may (cough) be over egging the situation when it says its "new" "disruptive" and "only we can do it" - to that i would say pull the other one. Hey if it creates a mania 1/4 the size of cabbage patch dolls or even enusres "souble digit medium term growth" i won't be complaining. I do slightly worry whether this companies products could be a flash in the pan - but on the balance of probabilities i think their products are unique and collectable enough with decent brand recognition to drive a great long term brand that might interest to one of the big boys- if you watch enough you tube videos with presenters adding their "pitch" from their spare room you will almost certainly have seen a Funko toy on the shelf in the background - and there is a decent chance it may have been baby yoda :)

per the company at Toy News International
“We are going to be out in the market fairly soon. But we’re going to be out in the market in a very different way. We have the ability to disrupt this space in a way that nobody else is doing right now. We can tie digital NFTs to our fan base and link entities with physical products. So for example, we had a pack of NFTs– I won’t mention, licenses right now, and there’s a few rare ones. If you have those rare ones, we’re going to give you a free product that’s tied to that rare NFT, which means you have a super rare physical product that ties to your super rare NFT. That’s disruptive, that’s new, it’s different, it’s only what Funko can do.”

i kind of think they may have missed the "Yeah Baby!" from the end of that statement.

Phil O.

hi Paul - would you ever take some time your to share your approach or view on top-slicing when bearish sentiment abounds, and/or when a share becomes over-valued?

So it's like having a patent on a basic widget?...but does it mean any market dominance? I'm not sure on it anymore...and i think they've gone into water/filtering so not sure if they are convicted about kettle elements as their no.1 strategy?

Yep they are all price-takers

SaarfLondon

26th Mar '21

great post - deserved many more likes

Small Cap Value Report (Weds 24 March 2021) - HAT, QTX, TUNG, BMY, SPE, TPFG, CTO

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Paul Scott

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