Small Cap Value Report (Weds 26 Oct 2022) - MADE, MEAL, BMY, OTB, VNET

25th Oct '22 by Paul Scott

43 comments 6722 reads

Good morning from Paul & Graham.

A couple of long-running problems (MADE and MEAL) look to be reaching the end game, so I typed up some thoughts last night (Paul). Happy to discuss, so please do add your thoughts in the comments.

Agenda

Paul's Section:

Made.Com (LON:MADE) - a bombshell announcement last night, saying that takeover talks have been terminated, as none of the parties could commit to the required timetable (end of October) for firm offers. Says it might suspend the shares. Unfortunately for holders, this looks as if insolvency is imminent.

UPDATE - another update this morning from MADE, saying that its operating subsidiary company, MDL, has stopped taking new customer orders. This looks to be a precursor to putting it into administration, as it needs more cash from the plc. This raises the interesting possibility that MADE might cut off its trading subsidiary from further funding, possibly leaving a cash shell with some remaining cash - so not necessarily a complete wipe out for shareholders? But that depends on what cash there is left, and also what liabilities are at topco level. I've just been discussing this with a bear on MADE, who dug out some interesting information that the group holding company seems to have given a pledge (which sounds like a fixed charge) to the bank, in respect of property leases. So any remaining cash might be spoken for possibly? It's total guesswork at this stage. Normally when companies fail, they're up to their eyeballs in debt, and there are cross-guarantees between group companies, so the whole lot goes into administration. MADE is unusual, in that it's got net cash, but is burning through it so fast, that the operating company will almost certainly have to be made insolvent. Possibly, leaving some cash at topco level?

Parsley Box (LON:MEAL) - another bombshell yesterday, with an announcement saying that it is considering de-listing the shares. Still has cash in the bank, but needs more. I'll be glad to see the back of this share, so we can focus on more interesting investment ideas with a better chance of success.

On Beach group (LON:OTB) [no section below] - last night I had a quick look at yesterday's trading update from this online travel company, concluding that it's starting to look potentially good value as a recovery share. Here's…

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About the Author

Paul Scott

Premium Member

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 Stockopedia.com on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »

43 comments

jburge

26th Oct '22

My experience.....as Paul mentioned with Parsley, the product is key to failure, I ordered a number a few years ago and some were ok, but most were terrible quality for the price. At least with IKEA you know what you are getting.

jburge

26th Oct '22

Indie

26th Oct '22

Hi Paul and Graham, the tickers have disappeared again (except Vianet). When this happens, would you prefer us to put it in the chat here or report it on the green button? I know you can put it right quickly, but if it's a tech thing then you might want us to go to the people who can fix it at source (we hope).

Paul Scott

26th Oct '22

Yes, I saw that announcement from Revolution Bars (LON:RBG) about share options. There are 230m shares in issue, so it's about 2% of the company. It always rattles my cage when I see share options being issued in a bear market. It feels like a kick in the teeth to shareholders, who have suffered the losses of a plunging share price, whilst management give themselves some free upside, on top of generous salaries.

Trouble is, if you kick up a stink about these things, nothing happens, because the institutional shareholders wave it through.

It was good to see some operational management being given share options too, but the overall numbers look far too heavily skewed to the CEO & CFO. Why does a CFO need share options at all? Yes it's an important role, but they're essentially keeping the score, not leading the team in a way a CEO does.

There's a lot of evidence to suggest that rewards from share options are often random - if you happen to be in a CEO job when the economy soars, profit soars, and the options become valuable. Plus they can incentivise excessive risk taking, e.g. using too much leverage to make reckless acquisitions.

Regards, Paul.

Markds28

26th Oct '22

Dulpesh we have all had disasters especially over the last 12 months, poking fun at siomeone who puts themselves out there is hardly fair. That said no doubt Richard bailed long ago as the story changed, I would have.

MrContrarian

26th Oct '22

Here's Liberum's initiation note in 2021:

"MADE is disrupting a £94bn market which is at a tipping point of online adoption. It has a disruptive vertically integrated model with strong competitive moats. MADE is about curation and inspiration and its design-led focus differentiate it from the wider market. Operating a just-in-time inventory model that, backed by MADE's proprietary technology, de-risks the model while maximising working capital and marketing efficiency underpins an attractive financial profile. With multiple drivers for sustainable long-term growth the roadmap ahead is compelling." TP 250p.

Since when is a store that designs its furniture and owns its factories disruptive? Like Ikea, MFI and Thomas Chippendale come to that. And when I hear the word curation I reach for my gun.

andrewdb

26th Oct '22

Any use of the phrase

"...<company> is disrupting the £<many billions> market..."

is an big avoid signal for me.

MrContrarian

26th Oct '22

Is using the word curated a red flag?

Companies using the word:

Time Out (LON:TMO) down 73% since IPO

Made.Com (LON:MADE) down 99.5%

Chill Brands (LON:CHLL) down 80%

[edit] Unbound (LON:UBG) down 92%.

cheeky_minnows

26th Oct '22

This deserves more than a thumbs up ! Unbound (LON:UBG) holds my first place for obfuscation (edit : in fact their RNS of 28 July 'Initial launch of curated multi-brand platform')

Tortoise investor

26th Oct '22

My own experience has been the opposite. All the products I've had have looked great and seem well constructed.

DaviStoVest

26th Oct '22

Assume you are talking about IKEA products ... and not Parsley Box (LON:MEAL)'s.

jamesalastair

26th Oct '22

Me neither!

...but we all make mistakes.

Lord Gnome

26th Oct '22

It’s the same old story. Bullshit baffles brains.

NewInvestor1972

26th Oct '22

Eurocell (LON:ECEL) - AXA have been selling out from 5.59% to 1.64%, could be a good reason why the price has dropped down to £1.31 now. £150 mil market cap at current volume.

Bargain I think.

TamzinPiworld

26th Oct '22

No plans to interview Richard at the moment. Yes, he got it wrong on Made.Com (LON:MADE) but got it right on Bloomsbury Publishing (LON:BMY) which is the stock that keeps on giving whilst paying you while you wait.

Graham Neary

26th Oct '22

Good question, Indie. I'm not sure. I've asked Paul what he thinks! G

Martinus 67

26th Oct '22

Good Spotting, ‘NewInvestor1972’.

Regarding institutions' buying and selling, how long does it take before Stockopedia picks this up?

According to my screenshot, AXA has not changed its positions since last year.

However, Stockopedia did notice a massive increase in volume sales, on 19/10/22, but according to my non-expert eye, it indicates a positive volume. so slightly confused.

The Jayman

26th Oct '22

Its recent update (early September for memory) looked favourable and its now below its March/April 2020 low, indeed hasn't been at this low level since July 2018.

SundayTrader

26th Oct '22

Paul, once the likes of Made.Com (LON:MADE) and Parsley Box (LON:MEAL) are out of the way, I wonder if this column could start picking up on some of the dull but creditworthy companies still turning in decent results. No one has commented today on the update from Solid State (LON:SOLI), but they have beat expectations, modestly, look set for further progress, and stand on a historically cheap valuation - PER of 14.2 and PEG of 0.6 according to Stocko. I hold these as it happens, but there are more of this ilk out there.

On a different note, thank you Graham for your comments on £VNET. Like yourself, I have been aware of this stock for a long time, but somehow they struggle to get enough money from their customers to pay for the business taken as a whole. In theory, this will change as the vending machines business develops, however, where are the numbers? And their customers must all surely be keeping cash on a tight rein at the moment. I don't hold.

illiswilgig

27th Oct '22

Regarding Vianet (LON:VNET) (I hold)

Warning - Long ramble. Huge apologies in advance. I meant this as a short response. I don’t seem to be capable of that and have ended up with an over-lengthy ramble on why I see an opportunity today in Vianet.

'somehow they struggle to get enough money from their customers to pay
for the business taken as a whole. In theory, this will change as the
vending machines business develops, however, where are the numbers?'

I think that's a good summary of the present situation.

It needs a lot of numbers to overcome the recent level of spending upon product development. All of which is capitalised and there has to be a concern that this is becoming a never-ending treadmill. Add to that the many years over which they have never quite managed to deliver the predicted growth. Does raise the risk a lot. None of which means that they won't achieve the numbers this time (or even next time) but it does mean the sensible option has to be to give it a miss. Presumably thats why the price remains where it is.

I also see the 'jargon-ology' that Graham described. Thank you Graham for the excellent review.

The gratuitous language that caught my attention in this update is

'data lake'

I mean. Puhleas :-)

I sense from this that they are trying very hard to sell themselves, mainly to customers, as a very different company today. Primarily a SaaS type company based upon (near) real-time data analytics, management and payment services from which they derive high margin recurring revenue rather than the box sales of old. I don't think the sales and marketing jargon impresses the small cap investment community much - especially those who invested in the dividend paying Brulines beer flow monitoring of old.

A big problem has been that the dividend paying Brulines of old paid out way too much to afford the product development the company needed to capture new growth markets. Whereas the Vianet of today is spending so much on product development it might never make enough profit to afford a dividend.

Will it end well? Tough one.

My problem is that I like the technology that they have developed and are continuing to enhance. And I like the market that they addressing with it.

In my view the pandemic and lockdowns are having two opposing impacts upon the company.

The most obvious is that it closed much of their customer base down almost overnight. The company acted swiftly to retain connections on reduced revenue during lockdowns. Inevitably a proportion of the customer connections were lost. Mainly old style pubs using the old brulines installations and old style vending machines (typically in offices, with no data connectivity). In effect this has sped up the loss of weaker and lower margin connections. As a result the company is now growing connections from a lower base than pre-pandemic, but once installed these connected devices are much stickier and higher margin recurring revenue.

Pulling in the opposite direction - Rather than hundker down during lockdown the company took a £3m CBils loan and blew it all on continued product development spend. launching its new cloud-based data management portal allowing its customers near real-time data insight and adding contactless payment provisions. I'm sorry it is really hard to get away from all the jargon.

A consequence of the pandemic has been to increase the volatility of sales from all types of sites as demand rises and falls sharply as well as a rise in cashless and contactless payments. For example - does a national coffee chain put in a manned retail outlet on a station platform, or an unattended site? With rising costs of manning the outlet, plus the increased risk of staff not being available - the ability to fulfil demand from unattended sites is increasingly attractive to chains trying to juggle rising costs with demand. Vianet is directly addressing this market. The Costa contract and the recent Lavazza win (across Europe - much of which won't yet be generating revenue) demonstrate the product is attractive and competitive. But the market is still growing from a relatively low base. The product is not limited to vending machines - sorry unattended retail - it is already refitted back into the old pub product as 'idraught', a hub enabling any remote asset monitoring as well as payment solutions, connection to POS, and other site management systems and devices.

Future market is potentially enormous. EV charging stations for example. But then in Vianet speak - it always has been and it might remain potential. Though it wouldn’t need to capture much to transform the companies revenues?

So then it comes down to the numbers, Which on the face of it are slow to recover to their pre-pandemic levels. The recent H1 showing a small loss (after a small writedown of intangibles). The update says that pre-pandemic revenue run rate will be achieved in the current half. Management still expects full year profits of 3.8p eps (I guess that’s probably adjusted in some sense) which implies current profitability is rising sharply from the first half around breakeven.

Even so its trading on over 14x forecast earnings in the FY to march 23 on the current depressed share price of 56p. Which is not cheap in the current bear market.

But an FY 24 with little or no futher growth would double that - 7.6p eps and a much more comfortable earnings multuple around 7x . Good value but not that cheap if it doesn't keep growing?

Will growth in earnings continue in FY24?

There is an assumption that the bulk of profits is provided by the old 'brulines' business. That's no longer necessarily the case .Looking at the numbers - that changed in the second half of last year FY22 - when operating profits at the smart machines division exceeded that of smart zones for the first time. And on lower turnover due to the higher margin of the connections.

The smart machines division increased connections by 25% in the last 12 months - although revenue only grew by 12.5% - indicating a lot of those connections whilst installed have yet to generate their first recurring revenue.

Thats a very promising performance for Vianet - but its early days. And if there is a banana skin out there - I'd fairly much expect them to find it. The headwinds of component prices for device installation and potential slow down in rate of new connections/closure of more hospitality sites are clear hazards if the looming recession deepens.

Thats my basic rationale for my recent investments in Vianet. Not the sensible approach but I like the new product (if not the language) and I like the markets it addresses in the long term. With the shares on 7x the year to March 24 it looks reasonable value right now – with the possibility (always accepting its chequered history) of GARP like growth in for little or nothing. But with little downside risk from here if it doesn’t materialise?

apologies for the over lengthy ramble

cheers

Mark

Small Cap Value Report (Weds 26 Oct 2022) - MADE, MEAL, BMY, OTB, VNET

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Paul Scott

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