Small Cap Value Report (Fri 14 July 2023) - ZOO, LIO, JSG, MCB, GYM, SOS, LGRS

14th Jul '23 by Paul Scott

67 comments 7693 reads

Good morning from Paul & Graham! There are lots of backlog items we want to get stuck into, so we're both working here today.

Today's report is now finished.

Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to review trading updates & results of the day and offer our opinions on them as possible candidates for further research if they interest you. Our opinions will sometimes turn out to be right, and sometimes wrong, because it's anybody's guess what direction market sentiment will take & nobody can predict the future with certainty. We are analysing the company fundamentals, not trying to predict market sentiment.

We stick to companies that have issued news on the day, with market caps up to about £1bn. We avoid the smallest, and most speculative companies, and also avoid a few specialist sectors (e.g. natural resources, pharma/biotech).

A key assumption is that readers DYOR (do your own research), and make your own investment decisions. Reader comments are welcomed - please be civil, rational, and include the company name/ticker, otherwise people won't necessarily know what company you are referring to.

What does our colour-coding mean? Will it guarantee instant, easy riches? Sadly not! Share prices move up or down for many reasons, and can often detach from the company fundamentals. So we're not making any predictions about what share prices will do.

Green (thumbs up) - means in our opinion, a company is well-financed (so low risk of dilution/insolvency), is trading well, and has a reasonably good outlook, with the shares reasonably priced.

Amber - means we don't have a strong view either way, and can see some positives, and some negatives. Often companies like this are good, but expensive.

Red (thumbs down) - means we see significant, or serious problems, so anyone looking at the share needs to be aware of the high risk.

I'm not sure how many of these we'll actually manage to do, but here's the list of possibles - update: we managed some at least -

Summaries of main sections below

Zoo Digital (LON:ZOO) - Down 37% to 66p (£65m) - Trading Update - Paul - AMBER

Accounts delayed by a month, due to adjustments relating to revenue recognition - doesn't sound a…

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Rusty2

14th Jul '23

I see, I could not see a connection with the others posts, thought I might be missing something.

There should be a US thread on Stockopedia.

jamesalastair

Drunkenmiller is short the USD .... he says it is his highest conviction trade.

yiannos1

Plus a dividend yield about 8-10%.

Mobico plc that is.

jonno

Hi Alberos,

I have a reasonable holding in Facilities by ADF (LON:ADF) bought at around 68p. It is the dominant player in a fragmented area of the media industry and is fully UK based. It appears well managed and has to my mind taken several positives steps to develop the business.

Acquisition of Location One enables ADF to provide a more comprehensive service to clients
Completion of its new operational base at Longcross, Surrey
Established a base in Scotland at Pioneer Film Studios

Given the significant expansion in UK film and TV studios the company has plenty to go at.

The writers and now actor's strike is a bit of a black swan and I been trying to logically think of the consequences for Facilities by ADF (LON:ADF) . At the prelims in May it stated that it was trading in line and confident of meeting current market expectations, also:

The FY23 order book is strong, indicating a continuation of the H2-FY22 profile, with larger productions generating higher revenue per job. The Group is presently taking orders for Q1 and Q2 FY24 providing strong levels of revenue visibility for the year.

I imagine that once an order is confirmed then any cancellation is subject to break clauses although in fairness I don't know. Also if actors are contracted to make a production, then again I assume they cannot withdraw their labour without being in breach of contract. However this is speculation on my part and I support the writers regarding the protest against the potential substitution of AI for human innovation and imagination.

Looking at it logically and irrespective of whether AI can substitute for human ingenuity and imagination which I very much doubt, one cannot make movies or theatre productions without actors and if you have no actors or writers, then there is little future for Netflix, Warner, Disney etc. On that basis I suspect that the actors participation in the strike will hasten a resolution.

So while the strike is clearly unhelpful for ADF it is difficult to know at this point what impact it will have. I did think of selling part of my holding and trying to buy back lower down but 'being clever' isn't my forte, so I have decided to do nothing.

I just stick to the numbers ( forward 2 years always ). That says that the debt will come down , the cash generation is crazy for its current market cap and will pay a10% dividend yield (10p). I am talking about 2025.

Who said what and when on any bulletin board doesn’t interest me and never influences my investment decision.

simoan

There was discussion yesterday regarding Jarvis Securities (LON:JIM) Jarvis and its profitable cash balances held in client accounts. I wouldn't be surprised if retention of interest by Jarvis and companies like Hargreaves Lansdown comes under threat as its an obvious case of consumer detriment. The regulator is looking into it now; "FCA quizzes platforms on interest paid on cash deposits".

I don't see it as too much of a problem for Hargreaves Lansdown (LON:HL.) as I'm getting 3.5% with them currently. The only broker account I have where cash is getting no interest currently is an ISA with IG group (LON:IGG). The issue for them and Jarvis Securities (LON:JIM) is that customers are liable to move cash out as their 0% interest looks totally anomalous. As someone else mentioned the other day, the IG ISA is flexible so you can move the cash out into an easy access account paying 3%+ to gain interest and put it back whenever you want before the tax year end, if you wish.

P Bryant

Man (LON:EMG) hasn't released yet, should be out next week with a few others, I'll update the charts then. I agree Man will be interesting, in Q1 they had strong inflows but dominated by their absolute return strategies.

Raleigh4343

Thanks Paul for the super Sosandar (LON:SOS) write up. I think it’s on the cusp of the start of something big and that patience here will pay - in style. A quick nod to the CFO Steve Dilks. He appears really across the money plan.

Wol

Zoo Digital (LON:ZOO)

Good judgement Mr Wolf. Sadly I didn't read the signs.

Short term problems - the writers' strike, the actors' strike, IFRS 15 adjustments... are usually good buying opportunities. But if AI takes over subtitling and dubbing that would be terminal for ZOO. It'll be difficult for Hollywood to replace actors (especially stars) but, IF AI can do the job well enough, replacing the translators who create the subtitles and the voice actors who record the dubbing tracks will happen with minimum fuss. They are mainly freelancers working on an as needed basis via ZOO and sometimes via another intermediate organisation. The risk is too great. I wish I had read the signs earlier.

Norfolk'n'Good

Quiz (LON:QUIZ)

Recent announcement of 15% fall away in turnover for first quarter Y/E 3/24 understandably spooked the market. However, these comparisons are against a strong first quarter trading period, with softer comparisons coming up for the next 3 quarters.

Company is forecasting a similar profit figure for FY 3/24 as FY 3/23, despite this drop in sales, due to reduced freight costs, falling energy costs and savings on rents following re negotiation of leases, (leases are approx. 15% Fixed Term, 35% Small Fixed Rent with turnover add on and approx. 50% on a turnover only basis).

Company is net cash and not paying a dividend - currently preferring to invest in the business ftb including 5/6 new stores this year (approx. capex £250k each) investment in to distribution centre upgrades/improvements approx. £1.3M, as well as IT and on-line platform improvements that should help drive website traffic, improve efficiency and will enable stores to satisfy website orders that can then be collected/returned in-store, much like Shoe Zone (LON:SHOE)

However, what I like about family owned retailers, (having been one myself for over 30 years) is that they find a way to survive and thrive. They are adaptable, flexible and can respond to changes in market conditions and sentiment very quickly. And it strikes me that a great time to invest in your business, streamline activities and get on top of costs is during a downturn in trade.

(Investors probably already know that this is a family owned business - total holdings approx. 49% otherwise, at the current share price, you could imagine the directors buying more.)

With brokers forecasting 1.7p EPS for this year and 2.5p next, I think that, on all metrics, the company looks very cheap. There has been no share dilution in the past 5 years but the share price has flat lined during that time due to erratic earnings. If profits return to pre 2018 levels then this share can seriously multi bag from here. I'm guessing it will be a bit of a rocky road between now and then - one to lock away and try and forget about in the short term!

Any other holders out there can add anything further?

Wolf of Small Street

"If in doubt, get out" or as Tuco Said in the Good, the Bad and the Ugly "When you have to shoot, shoot. Dont Talk" :)

Ive been surprised how good the very basic AI text to voice has become. Surely its only a matter of time before the customer can choose which AI language and accent/character they want, every Japanese dubbed anime Ive ever seen would be greatly improved if it was possible to get rid of the annoying American childs voice. Maybe ZOO will be at the forefront of this or maybe its years away and no present risk?

ed_miller

Re: Reading the signs earlier in the year at Zoo Digital (LON:ZOO) Always much easier in hindsight. Equally, looking into the future is much easier when equipped with an infallible crystal ball. (No position. )

Thanks for your input but I would have preferred some numbers in your analysis and not just stories based on personal opinions about the sector in general.

For example, where do you see the net debt in 2 years time?

How much cash will they generate in the next 2-3 years time?

Thanks

True, its much easier to see in hindsight because you can piece the puzzle together. Not that it matters but I wrote the same thing about them 2months ago, im not trying to be a smart arse after the event (and I lost money on them)

Just useful things to learn from. SRT Marine Systems (LON:SRT) pulled the same contract move 2 days before getting a placing away. Today Team17 (LON:TM17) have appointed a joint broker. No idea if they're looking at a fundraise but the shareprice is weak so its possible something will be coming in a month or two

Albertos

Thank you for that food for thought.

FREng

Thanks for the views on Quiz (LON:QUIZ) . How much risk do you think there is that the family will take QUIZ private?

Hi FREng

That is clearly a consideration especially given how small the market cap is now.

This is what Mark Simpson had to say regarding this precise point, on 31st May '23

Management and connected parties own over 40% of the Company, which gives them skin in the game, but should not be high enough for a delisting risk. The management also doesn't pay themselves exorbitantly, suggesting their interests are largely aligned with minority holders.

Stockopedia | Six stocks for contrarian investors | By Mark Simpson

I hope he is right! I guess we will have to wait and see?

marcusb

15th Jul '23

Thanks Norfolk'n'Good . I am also a long term holder of Quiz (LON:QUIZ), and was reassured by their latest earnings call carried out by "investor meets company". link below.
I was surprised that Paul Scott did not cover the results last week. Maybe it is too small now to be covered by SCVR. Anyway, I feel that going forward they will be in a much stronger position.

Paul Scott

Just FYI for anyone who uses it, the SCVR summary spreadsheet is now up to date, and all the tags have been put back into this week's SCVRs where necessary! Part 1 podcast just recorded, so will be up on the usual podcast channels shortly.

Screenshot of my spreadsheet (boxes pop up with a short summary when you hover over any ticker, as I did here on Sosandar (SOS) -

Thanks for the link Marcus - I'll take a look

Small Cap Value Report (Fri 14 July 2023) - ZOO, LIO, JSG, MCB, GYM, SOS, LGRS

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Paul Scott

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