Small Cap Value Report (Weds 25 Nov 2020) - G4M, SCS, D4T4, FUL, DLAR

25th Nov '20 by Paul Scott

102 comments 11064 reads

Good morning, it's Paul here with the SCVR for Wednesday.

Timing - I've got essential travel today, so will have to finish early - estimated at noon. Update at 11:26 - change of plan, I'm going to print off the results for DLAR, and review them on the train home to Bou'mth. Then I'll type up my notes once I'm home, so late afternoon.

Agenda - these announcements look interesting;

Gear4music Holdings (LON:G4M) - Director selling (Paul, done)

Scs (LON:SCS) - AGM Statement & Board changes (Paul, done)

D4t4 Solutions (LON:D4T4) - Half year results, six months to 30 Sept 2020 (Paul, done)

Fulham Shore (LON:FUL) - AGM statement & trading update (Paul, done)

De La Rue (LON:DLAR) - Half year results (Paul, to do later)

Gear4music Holdings (LON:G4M)

(I hold - Paul)

730p (unchanged) - mkt cap £157m

There were 2 announcements last night, detailing that 4 Directors of this online musical equipment retailer are selling some of their shares at 730p (market price). These have been placed with institutions?

Should we be concerned about this? I don’t think so, because the Directors (mainly the founder CEO) still have tons of skin in the game;

Following the sale, these PDMRs would in aggregate hold approximately 6,679,113 ordinary shares, representing 31.88 per cent. of the Company's issued share capital (a decrease from 36.18 per cent.).

In my opinion, it is only to be expected that founders of successful businesses want to take some money off the table at some stage. People want to buy nice houses, help others, and enjoy themselves a bit, and why not? For me, it’s all about the scale of their remaining holding. If Directors with big shareholdings (i.e. £millions) sell more than half their holdings, then that rings an alarm bell for me, and I would probably follow them out of the door.

However, in this case, the founder CEO still holds a huge stake, so I don’t have any concern about this part disposal. The fact that institutions lapped up the sale shares quickly, and at no discount, shows encouraging stock market demand.

I recently bought back into G4M, as numbers published were impressive. The downside scenario is that very strong trading this year could be a one-off, due to lockdowns. That…

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ken mitchell

25th Nov '20

I hope Paul will be able to cover De La Rue (LON:DLAR) results today or tomorrow as they looked OK but share price reaction suggests otherwise! Or is it just profit taking on a down day generally following a good run for the shares ahead of results?

Tanglands

cantab,Agree in principle but bridging loan finance is expensive, 8-10% pa, so share price would need to go some to make that worthwhile?

johnsmith68

I don't believe they do, or at least they don't appear to know that they do if indeed they do:

https://www.gear4music.com/inf...

Tommy H

I think that as someone who held Reach (LON:RCH) previously as an income share, and when the dividend was cancelled it nose dived and I sold along with a number of other income holdings to preserve capital, which I suspect a lot of folks did too.

With the lack of sight on whether dividends would be reinstated I missed the bounce, so congratulations for catching it!

Tommy

mojomogoz

Venture Life (LON:VLG)

£34m is meaningfully greater than their sales which were £20m in 2019 and estimated c.£30m for 2020. 2020 should be marked down as lots of hand wash plus the accounts have shifted a lot from white label to VLG brand which is a little odd and feels like a bit of gamesmanship to get the reported brand margin up as white label has been more profitable to date as having brand plays better than being a manufacturer.

Its not obvious what's happened in 2020 with this shift of revenue from manufacturing to brand - what's going on and why is it associated with a pick up in brand margin?

Previous raises have not been fully used for stated acquisitions and have been used to clean up financial position. Is that going to happen this time? Working capital position is quite large.

If they are going to acquire similar opps and they use all of the £34m then we are talking about something north of £20m acquired. This is much bigger than what they have tried to swallow before. This is not necessarily easy...a jump in scale and processes.

I'm suspicious that 'Target B' (UK heritage dermatological brand) valued at up to £20m is really about covering the fact that much of 2020s growth in revenue and profits is from opportunistic covid hand wash (the shift from manufacturing to brand sales is a clue). I am also suspicious of the idea that taking UK heritage dermatological brand global is immediate and easy win.

VLG are moving fast to monetise their new high market cap as they need to buy some sales to fill it.

Momoko Miyamoto

haven’t millions of Saga customers had their cruising careers prematurely cut short? Younger people will be too worried about the looming recession to go splurging on cruises. Operating costs are likely to rise too, vaccinations for staff, ppe extra cleaning etc

depends how much you like your parents ;)

Gromley

It is a fact that technology based shares are worth more on the Nasdaq! So was the market right in the summer when Reach was 50 odd pence. Or is it right now when the price is nearer 160p! The real value of the company cannot have changed in that time by a multiple of 3.

I missed that comment earlier on, but I think it really hits the point.

I have been invested in or watching Reach (LON:RCH) (TNI as was) off and on for over a decade and I have often said that market sentiment towards the company is key (sentiment has mostly been poor, occasionally indifferent and almost never - 'til possibly now - ebullient.)

During that time I held TNI (as it was then) whilst it 10 bagged. Sadly I bought very few at the very bottom, sold some on the way back and sold none at the very top. It has still been pretty good to me though.

During the time of that 10 bag I actually do not think the "real value of the company" changed too much.

As for the recent 3x change, I would agree that the real 'value' has not changed by that much; although I do think the digital progress has made a difference to the "real" value of the company.

I remain unconvinced that we should regard Reach as a Tech stock (we are not back in the 90s when it was not necessary for tech stocks to have even the first idea of how their tech might generate revenue and profits) so I am personally thinking it is beginning to look fairly (perhaps fully even) valued.

On the other hand if Reach can become recognised as a UK FAANG (perhaps implied by some of the site visit stat) then there could be a long way to go yet - as implied by some of the price forecasts being bandied about.

It might be an exciting ride from here, but I am fairly comfortable, even without being convinced on the "sunny uplands" scenario, I don't think the current valuation is to wacky.

This probably the most bullish post I have ever written on the company, so I do feel compelled to add the rider :

ALL IMHO and please DYOR

Harry Hindsight

Powerhouse Energy (LON:PHE) - "where theres muck - theres brass" - "where theres plastic - theres wind" not the same ring to it, so suggestions on a postcard.

Posters using WILL (not Will Smith)

JamesHolmes

Those well to do! They never took any risks or provided millions of jobs or did anything good anyway. There are so many often overlooked other taxes for being the owner of a limited co, e.g. Employers NI which stings hard just for employing people. And Employer Pensions contributions (which are steadily rising). Dividend’s tax advantages have also been reduced a lot in recent years to the point it isn’t really advantageous. I appreciate your perspective, but aligning us to the bod on the high street for CGT does not consider the whole story! It’s actually one of the only remaining financial carrots

Phuntt

I’m taking tax advice on this very issue at the minute - I’ll make a post when I get it all sorted in my own head. As far as I understand it, you absolutely need to be able to offset capital losses against capital gains (otherwise share trading of almost any sort would be unworkable). But tax is tax - it has to be paid no matter what you do. Dividends are treated differently (but they always have been). TS23’s point is key - have to very careful that investments the company makes are at least 51% in assets the inland revenue classifies as “trading”

Whatever your thoughts on the rights or wrongs of taxation, it’s fair to say that it is almost certain taxes are going to rise over the next few years. And we aren’t talking about small amounts so the rich are going to feel hard done by and poor are going to equally feel it’s not enough.
The key issue to remember is how do you continue to incentivize growing the economy while doing so? Because there is a line to walk here no matter how much people would like to ignore it - I for one am happy to pay more tax as long as I feel we aren’t snuffing out all incentive to create jobs and wealth in the process. The one thing that must be protected above all costs (even though it must be so tempting for governments) is entrepreneurs relief. Second behind that is CGT - not the threshold that simply creates a bizarre disincentive to sell above a certain level for wealthy people but the rate itself - it should not be raised as it disincentivizes people to make money.

rmillaree

I sort of see where you are coming from with your argument that oits all trouble and strife - but surely most bods don't start up in the business for the tax perks alone - surely that is a bonus or a marginal reason for going down that route. Traditionally we have been seen as business friendly compared to other countries but paying 1/3 of the tax compared to another bod with same income level isn't just or fair however you tart it up - nice if it exists but it really shouldnt be seen as a right or something you have earned by being self employed. I am playing devils advocate here in that i am all for a low Entrepreneur's rate of tax

Note employers NI and employers pension contributions are costs just like any other cost of doing business - they aren't a tax on you earned income they are just an expenses that needs to be met if you want to be in business in tis country.

Note i am not particulalry against alow entrepeanours rate personally overall but that doesn't mean i don't see the obvious unfairness of it. Particulalry if its a time when taxes are going to increase.

Dividend’s tax advantages have also been reduced a lot in recent years to the point it isn’t really advantageous.

I guess most employee bods would be happy if they could chop 20% plus off their tax bills (marginal rate 25% compared to 32% employee presuming not higher rate tax) - and also choose to not have to pay higher rate tax on their earnings by temporarily parking it in a bank acount and not spending it or better still make ita joint venture with ones spouse - there are plenty of advantages still of running a limited company IMHO - heck you can even buy a telsa via your company this year and knock that of your business profits (time to get rid of your Jag perhaps Paul ?).

anyways thats me over and out with my fairness rant for the day

UK_Investor_8888

I don't focus on The Tax. I focus on my vast profits.

There's money (free money) for everyone. It is what it is.

We here, as Stocko subscribers and wealthy investors, and I.M.s are in a privileged position in society that we are able to generate unbelievably huge sums of wealth, unattainable to most people.

Let them eat cake.

Risk:-

I've had two startup businesses swallow up the seed capital and disappear to zero. Investing in resources and taking on staff is expensive!

Lessons learnt!

2ShedSam

"There are so many often overlooked other taxes for being the owner of a limited co, e.g. Employers NI which stings hard just for employing people. And Employer Pensions contributions (which are steadily rising)."

LOL, like they are personal taxes. They are ultimately paid for by your customers. Your costs go up, your prices go up, customers pay. Hold your margins and your absolute profit goes up. I used to love those minimum wage increases, those extra pension costs to justify increasing my prices to grow revenue.

CHFPINVESTMENTS

26th Nov '20

Shares look to have been taken by Aberdeen Standard

I don't take on staff anymore. Its too much hassle (administratively). There's H&S, Political Correctness and The Compulsory Pensions Regulator bullshit.

Its easier just to pass Contracts between other businesses.

I think it was a bad policy - of the Conservative governments - to make it harder for small (1-10) businesses take on staff.

The result of these policies is contracts, some, go overseas, err outside The E.U..

Laughton

Re Gear4Music (LON:G4M) - yes and a whole lot more.
Reassuring.

Small Cap Value Report (Weds 25 Nov 2020) - G4M, SCS, D4T4, FUL, DLAR

Gear4music Holdings (LON:G4M)

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Paul Scott

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