Small Cap Value Report (Weds 31 Jan 2018) - BOTB, JOUL, BST, SAT, RNWH

Tuesday, Jan 30 2018 by

Good morning, it's Paul here!

To get you started today, here is the link to yesterday's completed report. I added new sections on Filtronic (LON:FTC) and NWF (LON:NWF) in the evening (EDIT: extra bits added re NWF, after talking to an adviser to the company, who helped me with understanding the business model)

On to today. I see that yet another outsourcing company has run into trouble. Capita (LON:CPI) this time. The RNS today says that it needs to raise c.£700m in a Rights Issue, has suspended divis, and is to make non-core disposals, and cost savings. It's become too big & complex. I don't know the company at all well, but it seems to me there are 5 clear lessons to be learned from Carillion, Capita, and previous failures in the outsourcing & support services area;

  1. It's a lousy area for investors, unless the business is focused in a specialist niche area, and is very well managed.
  2. Operating a group with a weak balance sheet, loaded up with debt from acquisitions, is very often an accident waiting to happen.
  3. Contracting businesses often mess up contracts in one way or another. This is bound to happen, as offering to build something large, or provide a complicated service for multiple years, is fraught with risk. Yet contractors often under-estimate the risks & costs, in order to win the contract, sometimes at an uneconomically low price.
  4. Investors are often sucked into shares in this sector due to a high dividend yield. Companies with weak balance sheets, lots of debt, and paying big divis are an accident waiting to happen. I only go for high yield shares if the balance sheet is bullet-proof.
  5. The accounts in this sector cannot really be relied upon. Reported profits often turn out to be illusory, once problems with contracts later emerge.

Overall then, my resolve is stiffening to avoid this sector like the plague.

Best Of The Best (LON:BOTB)

Share price: 255p (unchanged today, at 11:31)
No. shares: 10.12m
Market cap: £25.8m

(at the time of writing, I hold a long position in this share)

Interim results - for the 6 months ended 31 Oct 2017

Best of the Best runs competitions…

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Best of the Best Plc runs car competitions. The Company displays luxury cars as competition prizes in rented retail space within airport terminals, at shopping centers and online. The Company is engaged in selling tickets to passing airport passengers, as well as from online customers through its Website. The Company operates from approximately eight United Kingdom and over two international airport sites, as well as approximately from three shopping centers. The Company operates from various airport sites located at Gatwick North, Gatwick South, Birmingham, Manchester Terminal 1, Edinburgh, Dublin's Terminal 2 and Westfield shopping center located in London's Shepherds Bush. The Company's Indian franchise trades under the BOTB brand from Hyderabad airport. The Company carries out its principal operations in the United Kingdom. The Company's subsidiary is Best of the Best ApS. more »

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Joules Group PLC is engaged in the design and sale of lifestyle clothing, related accessories and a homeware range, through the multi-channel business structure embracing retail stores, e-commerce, county shows and events and wholesale. The Company has three segments: Retail, Wholesale and Other. The Retail segment includes sales and costs relevant to Stores, E-commerce, Shows and Franchises. The Wholesale segment includes sales and costs relevant to the sale of products to other retail businesses or distributors for onward sale to their customer. The Other segment includes income from licensing. The Company's products include womenswear, menswear, Little Joule, Baby Joule, Wellies and homeware. The Company operates 97 the United Kingdom and Republic of Ireland stores (including five concessions) and three franchise stores. Joules branded products are sold through selected wholesale partners, primarily in the United Kingdom, North America and Germany. more »

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Big Sofa Technologies Group PLC, formerly HubCo Investments PLC, is a holding company for Big Sofa Limited. The Company is a business to business (b2b) technology company that provides video analytics, serving both brand owners and market research agencies. The Company has built a platform developed in the Ruby language and using the Rails Web framework. Its platform enables users to ingest, manage, search and perform detailed analysis of video, images and audio content. It enables consumers to upload unstructured video content to its cloud-based analytics platform. The platform then transcodes and transcribes the data into a structured and downloadable archive of content. The platform can be used on a software as a service basis or in conjunction with its account teams. In addition to the analytics platform, the Company has developed a range of ancillary services for brands, agencies and consumers to upload video into the core platform. more »

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

56 Comments on this Article show/hide all

dangersimpson 31st Jan '18 37 of 56

In reply to post #307293

The cash is upfront payments by customers so while it provides a good liquidity barrier it can't be paid out to shareholders so I don't think it should be counted in the EV.

That said I think £30m PBT is conservative if load factor continues to improve as routes mature & fleet growth moderates. On the majority of their routes Flybe (LON:FLYB) are not competing against the jets of Ryanair Holdings (LON:RYA) & easyJet (LON:EZJ) but road and rail. So as more people decide to avoid the clogged roads or expensive trains the better it is for Flybe (LON:FLYB). They just have to get their costs under control to fully capitilise. So overall I agree a 3-4x medium term upside is possible.

NTAV is the owned planes so even if Flybe (LON:FLYB) fail to turn it around it is not inconceivable that a player like Stobart Air would want their slots & their planes to try to make a go of it. This provides some downside protection.

So overall there is a decent upside if they execute well and a limited downside if they fail.

Book: Excellent Investing: How to Build a Winning Portfolio
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Michael Billingham 31st Jan '18 38 of 56

What's happening at Bioquell (LON:BQE) ? Down 17% in 5 days despite announcing that y/e pre exceptional pbt will be significantly ahead when results are announced 0n 7 March.
I hold - have I missed something?

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Private_Investor_Blog 31st Jan '18 39 of 56

Paul, As someone who works in the hard facilities management part of outsourcing and construction projects sector, can I just say your analysis of the sector from an investment point of view is very succinct and spot-on !

Quite apart from a diversification of income point of view (as I work in it), I find it uninvestable !

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davidjhill 31st Jan '18 40 of 56

In reply to post #307303

Agree - I don't think all cash is upfront payments as they were always well "cash" funded since the last bail out placing xx years ago to repair the b/s. However, I share your view that downside should now have some protection (possibly around this level) with a successful continued turnaround offering good upside. Certainly feels as though risk / reward ratio is finally skewed favourably.

Be interested in any other knowledgable Flybe (LON:FLYB) investors views too. I am leaning towards a small position.

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Zipmanpeter 31st Jan '18 41 of 56

Re Best Of The Best (LON:BOTB)

Issue re 'pedestrian' online growth of 6.8% YOY is linked to the ownership/Board. Son and founder (William Hindmarch) is backed on the Board by his Dad and (I think) a friend from college albeit one with a city education. This is therefore now a lovely lifestyle business for the owner and mates/family that will probably continue to make very good money. So hats off - I wish I had done something like this. The combination of salary and dividends must create a very comfortable life for the Hindmarch crew.

However, for real growth they need more expertise and attitude on the board especially on a commercial side.
There must be any number of ex gaming site Directors who would like to have a role in the BOTB fancy car business. The basic business model is now largely proven.

The business should i) (as Paul says) be pushing more money into online Marketing to drive growth and ii) be looking to replicate the model in other jurisdictions and ii) looking to replicate the model overseas. But I fear the marketing results to date will not inspire confidence in the Board. Scattergun approach to Marketing eg No mention of TV advertising this time (which IMHO was a another plaything for Mgt to discuss at dinner parties), new low cost to enter games are a good idea but are presented on the website in a dull way with no focus. They now have a good sized marketing budget and could really accelerate with a better commercial strategy.

Perhaps Paul can somehow communicate that an even nicer lifestyle awaits if the current owners sell out but retain a decent share (say 25%) with some professionals to run it day to day. Otherwise expect otherwise happy holders like me to exit when and if there is a spike up.

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SundayTrader 31st Jan '18 42 of 56

In reply to post #307218

Would really welcome your comments on Satellite Solutions Worldwide (LON:SAT) . Interesting "binary" situation, with what looks like an impossible debt load, but they could just be reaching the point of generating some real profits for the first time. I don't own, though have in the past, but sold after reconsidering the risk.

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tony akram 31st Jan '18 43 of 56


Many thanks for the Minervini screen

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matylda 31st Jan '18 44 of 56


Thanks also for the screen, hope the Doc found it :)

Blog: Briefed Up
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nicobos 31st Jan '18 45 of 56

Paul - I note your comments on Best Of The Best (LON:BOTB) and frustration with regards their current strategy.

What are your views on shareholder activism and is this an approach you have considered?

I guess now that you are committing larger chunks of capital into fairly small businesses, a greater say in how they are run in order to help drive shareholder returns could be a valid investment approach!?

As an aside, I'm sure if you add up the Stockopedia community's holdings in some of the more popular small caps, we'd have a real presence on the shareholder register!


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financeguru2000 31st Jan '18 46 of 56

Can anyone explain the dip in Patisserie Holdings (LON:CAKE) please.

It reached highs of about 405p two days ago.


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ed_miller 31st Jan '18 47 of 56

In reply to post #307403

Re shareholder activism and Best Of The Best (LON:BOTB) Only 15.4% of the issued shares are in free-float, and since the founders can do what they want if they control or influence at least 75% of the shares, there is no threat of activism stopping them from doing whatever they want.

(I have no position in Best Of The Best (LON:BOTB) )

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Funderstruck 31st Jan '18 48 of 56

In reply to post #307058

Thanks fwyburd for your synopsis , far more efficient than myself; I too attended and it was the one point that Gervais Williams made with regard to Fund Managers now starting to get really into AIM stocks to give them an edge over otherwise rather mundane performances; which made the most impression. The price of those stocks, of sufficient size for funds to buy a reasonable amount, will be well supported through any downturns.

Of the Small Caps; The Chargemaster CEO gave an excellent presentation, word perfect, he clearly knows his subject and previously created a successful startup. I put my name down for info when they have their IPO.

The only other one of interest was CML Microsystems (LON:CML) ; had a long discussion with the CFO who was appointed after the 2014 downturn; they have reorganised , spend far more on R&D, massively improved the products & gaining good customers. The price chart is just about to break out , so will be watching.

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Funderstruck 31st Jan '18 49 of 56

In reply to post #307208

Wincanton (LON:WIN) As I read the chart , the main trend has been UP sinceOct.2013 and the current trend from June 2017 is a retracement leg which is just about to come off the bottom of the channel , so could be about to turn. Apologies for the intrusion.

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Fegger 31st Jan '18 50 of 56

In reply to post #307413

re Patisserie Holdings (LON:CAKE) I can see falls in EPS forecast for January on the Broker Forecasts on the main Stocko page . Sorry don't know how to copy the images. May be the reason.

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Dieselhead2 31st Jan '18 51 of 56

Hi Paul, I appreciate you have a long list of companies to comment on today, but if time permits I wonder whether you maybe able to briefly run your 'slide rule' over the results from Ashley House (ASH). Thanks to you and Graham as always for a top class service.

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jraitt 31st Jan '18 52 of 56

BOTB. I used to have a punt on their site until they changed their website. Previously one picked - say- 10 cars then went in to play spot the ball and after 10 x's it told you. You then paid - all done. Now it allows you to carry on putting x's so you can't delete the x's so they want you to pay more. At this point I just left the site. Can't believe that I am alone. I did email them but bot no reply.

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Andrew L 31st Jan '18 53 of 56

Capita (LON:CPI) Woodford never really had much of an overall approach. He didn't distinguish between quality and non-quality well and didn't identify risks well. I also think that the cult of one person isn't great. At Fundsmith there is a proper team but at Woodfood it all seems to be about Neil.

Neil Woodford's approach was obviously lacking in a few areas.  Shame to see him fall like this but he has made self-inflicted errors.  He is meant to be preserving and growing capital but got the former wrong.

On many of Neil's investments he "tried to be clever."  He is not an early stage investor and he shouldn't try to be.  Investing in tobacco and early stage stocks doesn't fit together well.  He let his clients down.  

Interesting how Hargreaves Lansdown (LON:HL.) hyped him up significantly.  Many their clients should ask why exactly.  This is why I don't think I would ever want to be an HL client.  Always hyping fund managers who are often of dubious quality.

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nigelpm 31st Jan '18 54 of 56

In reply to post #307303

I'm afraid I still take the bear view on Flybe. Only reason IMHO Q4 looks much better is the Monarch capacity was taken out of the UK market.

All that will happen is RYA and EZJ will keep up the pressure on the rest.

Can't see any way for Flybe to find a niche.

Not looked at the numbers in detail though - just taking a macro view of the sector.

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gus 1065 31st Jan '18 55 of 56

In reply to post #307218

Hi Paul.

Thanks for the review of Satellite Solutions Worldwide (LON:SAT) .

I agree with your view that the balance sheet is lousy, although given the annuity nature of their subscription income stream I think their business model is akin to that of a utility capable of supporting quite high leverage (though not as high as it is at the moment). One thing in their favour is that so far they appear to have been able to source fresh capital with apparent ease from both shareholders and banks and also the BGF (Business Growth Fund). Over time they will hopefully reach the critical mass necessary to support the central overhead while generating sufficient cash to deleverage.

Given the importance of broadband access, I think they also have the benefit of being in good odour with the governments of the countries they operate in for providing essential infrastructure to remote areas. In due course this could give them a seat at the negotiating table over subsidies etc..

One possible concern is that if the company is ultimately successful the PI’s may get stitched up by the management and Harwood Capital taking the company private at a negligible premium.


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dgold 31st Jan '18 56 of 56

In reply to post #307208

Paul, many thanks for your excellent analysis and comments.

I just can't resist pointing out that even if you were to take a chart of share price with a downtrend and look at the chart upside down it would still show a downtrend.

Sorry! Thanks again for everything.

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 Are LON:BOTB's fundamentals sound as an investment? Find out More »

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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