Stockopedia StockSlam - October 2018

For our latest StockSlam event we decided to try a new and larger venue, wework at Aldwych House, but still in Central London. This gave us the space for an audience of around 75 with plenty of room for socialising afterwards - an essential requirement.

Before kicking off I (couldn't help) noting the sharp correction in global stock markets, which has hit many of us where it hurts. At times like these I often remind myself that I'm in this for the long haul, which means that I don't intend to touch these funds for at least a decade, but that's not true of everyone. 

So I did a quick audience survey on investment time horizons to check our demographic with this result:

• 10% of audience are drawing down money now for expenses

• around half plan to use their investment the money in the next 10 years

• the rest are looking further into the future

With this in mind I was curious as to how people are reacting to the current volatility. Personally I've added to a selected few of my holdings, where I see particular value, but I haven't made sweeping changes to my portfolio. However quite a few people are talking about how they're fully, or mostly, in cash as they wait for the bear market. Lucky them!

So what were people in the audience doing?

• around half are doing nothing

• are few (perhaps 10%) are selling to accumulate cash

• the rest are hoping to start buying when the dust settles

With most of us hoping to find some interesting and actionable ideas at the StockSlam I believe that the presenters didn't disappoint; all of them did a great job within their allotted 3 minutes and I've tried to give a taste of their pitches with the notes below. Big thanks to Jack and Ed, from Stockopedia, for actually taking the notes though!

Stop press: I'm pleased to say that the next StockSlam will take place at Mello London in November. If you'd like to present, which I thoroughly recommend, please follow the instructions here: https://www.stockopedia.com/co... 

K3C (LON:K3C)

• Corporate broker - helps small businesses (up to £200m market cap) market themselves to potential buyers

• K3C has a StockRank of 84 and is classified as speculative small-cap high-flyer

• It has high margins and is a capital light business

• Directors own 35% of the company

• Reputable chairman in Ian Mattioli (co-founder of wealth manager Mattioli Woods (LON:MTW) )

• Low sales visibility and business could suffer during a recession

• Key person risk — K3C relies on its salespeople

• K3C has only been listed for 18 months and so has a short track record

• Its shares have more than doubled in this time, however...

• Its shares have fallen c29% since it released results in mid-September, despite said results being ahead of market expectations

• Shares are currently at 250p, giving it a market cap of £106m

• It has a pipeline of 1.4m potential business targets

• It filters this down to around 400 qualified leads per month and talks to these candidates

• This results in around 50 offers per month and 10 completed transactions

• AGM on Friday 26th October so there may be a trading update then

RM (LON:RM.)

• Operates in Software & Computer services providing software to the education sector

• It has a StockRank of 96 and is classified as Adventurous, Small-Cap, Super Stock

• 3 subdivisions:

• • RM Resources (45% of revenues)

  • RM Results (17% of revenues)

  • RM Education (38% of revenues)

• 85 different companies

• 1/5 revenues from abroad, majority from this country

• 56% of sales through annuity —> repeatable profits

• Recently generated significant contract wins

• Other positives:

• • ROCE of 37.4%, 10y average 29% — very high

  • Top 10% for this metric in its sector

  • Adjusted operating margin above 10%

  • Economic moat - creates switching cost in terms of time and money

  • Market leader

  • Acceptable level of debt

  • Would take less than a year to pay off debt

  • It has paid dividend for 22 years

  • Recent statement very positive

• Share Price down 30% ... provides great buying opportunity - long term hold.

Ab Dynamics (LON:ABDP)

• StockRank of 55, classified as Adventurous, Small-Cap, High Flyer

• Low value rank of 4, 12-month forecast rolling PE ratio of 28.5x

• Share price of 1123.6p gives a market cap of £240m

• Founded in and provides automated testing solutions for the global auto industry

• Listed on AIM - 2013 at £1 and recently peaked at £14 (14 bagger in 5 years).

• Recent trading announcement - will beat the market

• • Has a solid track record of beating market expectations

  • Automated cars could become a huge market

  • Significant growth from an employee perspective. 150% growth

  • New Germany plant to deal with potential Brexit complications

• Management

• • Recruited new CEO - (not sacked!) - some saying the old didn't have the experience to grow

  • Chairman has 70% of stock

• Balance Sheet

• • c£10m net cash position

• Risks

• • Progress in billing?

  • Forex can have impact - but pound going down

• Questions

• • Would you buy it today? Yes

Miton (LON:MGR)

• Edmund Shing's (ES) pick. A £109m market cap investment management company

• Gervais Williams is a well-regarded fund manager

• StockRank of 94, classified as Adventurous, Small-Cap, Style Neutral

• Why is it interesting?

• • Bizarre thing - it's a sector ES hates. Asset managers are a car crash. They've done badly. Standard Life/Aberdeen/Jupiter they've all been awful...

  • So why look at the sector? Miton is a fantastic company

  • Asset Growth - £3.35bn → £4.45bn with more to aim for - growth of assets in 2 segments

  • • Gervais Williams - Small Caps

    • Martin Turner - Multi-Asset funds

    • Dragging assets away from other teams

  • QVM

  • • Earnings Momentum going up and up... upgrading all the time

    • Quality - very strong, net cash of £21m. 20% in cash... and they pay 3.5% dividend. Very solid, very sexy balance sheet(!)

    • Operational leverage is very high

    • Value - despite performance, ex cash P/E only 10x - strong growth franchise - only going to grow the cash pile

  • Risks

  • • If the market goes down, there could be less inflow in funds

    • Key person risks - good news is that the 2 main employees own 30% of stock.

Bilby (LON:BILB)

• Building services company serving local authorities. Shares priced at 90p give a market cap of £37.3m

• StockRank of 91, classified as Speculative, Micro-Cap, Super Stock

• Rose 12% on October 23rd, possibly as a result of an Investor's Chronicle tip

• Why pick?

• • Strong stock - 135p peak this year... down to c90p

  • P/E is only 6. Deep Value Stock. You'd expect it to be struggling but revenue and profit both growing

  • Dividend 4% ... good quality numbers - ROCE of 20.9%

• Founder had 30% of the stock... recently sold. There's a lot of liquidity and excess stock out there

• Reviewed by Paul Scott in July - at that time £1.23. "Price a bit rich" but has since come down

• Support at 89p

Local Shopping Reit (LON:LSR)

• Mostly high street shops

• StockRank of 47. Classified as Conservative, Micro-Cap, Style Neutral

• Investment case:

• It's liquidating and will be returning cash

• Nov. 2016. A major shareholder sent a requisition for a general meeting to sack the board and replace with his mates

• Spurred the board into action - released results 1 month later and published road map for disposals. Started selling down

• Progress:

• • July this year - all debt paid down

  • Released RNS this month

  • 2 years ago £75m of properties

  • Now only £10.5m and half auctioned this month

  • Estimate of 33p to 34.5p which compares to 30p share price

• Spread is tight at 2%. You can put order on order book and might not have to pay the spread if you have Direct Market Access

• Next Steps:

• Likely to put a vote that they will liquidate and return cash

• Solaso - has 35% - has potential to reject it. But if he's rational he'll support the vote

• If we're pessimistic - there's a 33p liquidation in 6 months... it's at 30 now.. so there's a probability of 20% rise annualised

Diversified Gas & Oil (LON:DGOC)

• In the US Gas & Oil biz, StockRank of 57 but Momentum of 99

• Speculative, Mid-Cap, Style Neutral

• Company says it's low risk, however

• £625m market cap

• Listed on AIM Feb 2017, shares have nearly doubled

• Operates out of the Appalachian Basin across 3 states - Pennsylvania, West Virginia and Ohio

• Low risk oil producing assets

• Consolidator

• Generates FCF

• Has grown quickly through acquisition but there is also organic growth potential

• By 2009 it had grown to 237 wells. It now has more than 1600

• 4 largest shareholders have 26% - founders still own 6%

• Experienced managers

• Oil & Gas not hot sector, but low risk operator and growth makes it lower cost per boe

• Made some big acquisitions - Should be £400m revenue in 2 years... was £40m in 2017.

• PE 2019 is 8... but dividend yield is 8%

• Well financed. Hedged

UP Global Sourcing Holdings (LON:UPGS)

• £28m market cap, £34m EV

• StockRank of 87. Classified as Highly Speculative, Micro Cap, Contrarian

• £5.5m net profit July last year

• Sales of £88m (trades at 0.32 times sales)

• Bumps in road - will it be cheap?

• Yes very much a recovery stock

• PE > 6, Yield 8% after dividend was halved

• Either cheap for a reason or deep value?

• Decline gone further than justified

• Good QV (52 & 99), poor M (16).

• "Ultimate Products" - not high end furniture. Everyday household products such as luggage and toasters...

• Good brands - Russel Hobbs etc

• Sells to 40 countries. Some resilience.

• Doesn't own manufacturing. No Shops. It sells online. These are strengths.

• Defensive characteristics - everyone needs a kettle and luggage. Resilient. Far from glamorous and unloved...

• Sales went down due to a change in how they account for revenue

• Valuation should go up - why? Broker called Equity Development suggested P/S as valuation metric. Said P/S of 1 was about right... it's currently 0.3.

• Founders hold 30% of the company.

Altitude (LON:ALT)

• Highly Speculative, MicroCap, Momentum Trap - StockRank 17

• £40m market cap

• Run by Nicole Stellar - CEO for 6 months.

• 2019 EPS downgrade

• Pivoting to the future.

• disintermediating promotional goods market via software

• 2 major clients - CEO

• AIM - leading

• $22bn market - very fragmented

• Distributors join AIM for small fee to help with payroll, logistics and tech savviness.

• Deal with altitude... distributors get software for free... ordering functionality, help with web formation - allowing distributor to monetise google search

• Just like JustEat - free for consumers... restaurant becomes provider - JustEat provides traffic. Supplier agrees to provide software and provider gets a cut of traffic.

• The model I use (my model and maths) assumes 400 members signed for full year 2019 i.e. 400 off the 1800 Aim members are on-boarded end 2018, then 60 a month on-boarded each month through 2019, * average pro forma annual revenue of the member at $866,000 * average GTR at 3.25% which is the rate the supplier pays * an assumption that only 50% is invoice-able which infers half the suppliers are not signed up.

• Speak about what is happening? Do AIM members like it?
  

• Repeat orders... 50% of new members have used it more than 5x. Revenues gross margin 85% - revenues are visible and recurring.

• Stock market will pay a high multiple as it has for other marketplace businesses.

Elektron Technology (LON:EKT)

• Speculative, Small-Cap, High Flyer

• £65m market cap, listed on AIM. StockRank 86.

• High PE for company that's recovering?

• Performing very well.

• 3 divisions - but need to understand 2

• Bulgin - designer and manufacturer of components (underwater, cold, Bellagio fountains in Las Vegas - marine industrial etc) Global footprint. 25% operating margins. Cash generative, double digit sales growth.

• Checkit (software, loss making) - enable productivity improvements in food services industry. Replace paper based checklist to standardise process. Provide cloud storage and management insights. Blue Chip clients e.g. Compass, Center Parcs - save 20,000 hours per year. Saving of £200,000 per year.

• Valuation

• Bulgin on a 2.5x EV/Sales multiple should be £75m market cap vs £66m

• Checkit for free

GVC Holdings (LON:GVC)

• StockRank of 41. Classified as Balanced, Large-Cap, Style Neutral. Betting company

• Betting company

• Recent results - growing fast

• Has just taken over Ladbrokes

• Market Cap £5bn.

• Kenny Alexander CEO - Ladbrokes integration couldn't be going any better. Taking market share in all key markets

• Valuation is low. 11.5 PE

• Catalysts:

• Has just done a deal with MGM - largest consumer operator in the US. Waiting for US to open up to gaming again - it's now happening - combination of MGM and GVC - 25 year venture - it must be a market leader. Next 5 years the US should become the largest gaming market in the world

• Extremely attractive outlook

International Consolidated Airlines SA (LON:IAG)

• StockRank of 80. Classified as Adventurous, Large-Cap, Contrarian

• 20% per year upside? 50% per year over 2 or 3 years? Simple story... that's what the pitcher looks for.

• IAG - 560p - £11bn. Yield about 5% and a forward PE ratio of 5.5x

• Cheap and worthy of further analysis.

• No liquidity issues, and possibility of a takeover

• Operate various premium airline brands

• AVIOS, BA, Aer Lingus etc.

• Bias to long haul flights - a growth market

• 5% growth in sales per year over last 5 years

• Margins are good.... ROCE of 20% and ROE of 44.7%

• Even if margins reduce, you'll still have a P/E ratio of 7/8 times

• Debt moved from £2bn to £1bn cash

• Can grow without relying on debt

• Risks:

• Pension commitment. Now in surplus. If pension didn't exist... IAG would currently have cash equal to market cap

• Underlying business generating huge cash flow. As business gets bigger, pension problem becomes relatively smaller.

• Long term:

• 2003 - 100p share price. Now 550p. It's a long term, unexciting grower with a track record.

• Share price down 20%. Buying opportunity.

Eservglobal (LON:ESG)

• StockRank 0 - Highly Speculative, Small-Cap, Sucker Stock. Big Laugh, brave call

• "For investors who like a challenge."

• What does it do?

• Enables cross border payments

• Eserv Global - basket case being turned around. Story is it will break even or be sold - not a reason to invest

• Other part is a 30% stake in JV with MasterCard and Bix. Uses Eserv Global tech for P2P biz payments. MasterCard aggressively investing in non-card payments technology... potential to be a global payment network to bypass the bank network. Huge potential. Right now no banks using this technology at scale

• Bringing banks on board and testing technology. If it's going to work we should see some announcements in the next months or year. Share price should rebound.

• Risks:

• Mastercard could spurn them at any time — this happened to Monetise

Disclaimer: All of the information presented here is purely for educational and entertainment purposes and is not a recommendation of any of the shares mentioned