Small Cap Value Report (Wed 12 April 2023) - SED, SOS, SYS1, EMAN,DLAR

12th Apr '23 by Paul Scott

60 comments 7491 reads

Good morning from Paul & Graham!

Signing off for today at 13:08

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 £700m. 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.

Summaries of main sections

(more detail below)

Sosandar (LON:SOS) - FY 3/2023 TU - unch at 23.5p - (market cap £59m) - Paul - GREEN

Revenue in line with expectations, but PBT is c.£1.6m, a shortfall from £1.9m forecasts. Blamed on accelerated growth spending (eg. some key new hires). Now pushing ahead with international expansion via partner(s), which I think is more important than a slight profit miss. Plenty of cash, following another fundraise recently. Ambitious, capable management. I think risk:reward is now better than it's ever been, with the company now profitable & international expansion starting.

System1 (LON:SYS1) - ahead of expectations TU - up 14% to 185p - (market cap £23m) - Graham - AMBER

Profitable in H2 and for the year. Shareholders must now decide on a proposed management shakeup. As usual, SYS1 looks frustratingly close to long-promised success.

Saietta (LON:SED) - 70.5p (market cap £73m) - Paul - RED

A very strong share price rebound in recent weeks has caught my eye. Unfortunately, I think this looks like a speculative bubble at this stage.Negligible revenue and gross profit to date. Very heavy cash burn means I suspect another fundraise is highly likely, despite the company's…

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Equity Development

12th Apr '23

Cohort plc (LON:CHRT) no news out today, but there has been a nice recent run of contract extensions so ED research update published with fair value kept at 650p/share. Note is here https://www.equitydevelopment....

davidjhill

Agree with all of that but the point I am making is that historically share buybacks have been seen as generally good for the share price.

However, in a number of instances in the current market buybacks have actually resulted in continued share price slides BUT when stopped have resulted in quite big bumps up.

Tremor International (LON:TRMR) is an example of stopping. Up 15% since they stopped buying back shares

Georgia Capital (LON:CGEO) was an example of an announced share buyback today resulting in quite a large comparative fall (despite its main asset going up).

There are other examples - just these two highlight it.

ChrisW

Paul, glad you are having a rest.

We had a little chat on Crimson Tide (LON:TIDE) a few days ago.

A few back of the envelope sums.

Turnover growth has accelerated from 17% in year to Dec 2021 to 31% to year of 2022 following investment in marketing etc post the cash raise in April 2021.

FinnCap have t/o growing at 31%again to Dec2023 and then accelerating to 47% to Dec 24.

The gross margin is 84% and looking at Finncaps forecasts it seems that all other expenses were about £5.9m

As they have already built up the infrastructure for increased sales, Finncap have expenses staying at about £6m for the next two years. This leads to a pbt of £2.3m in 2004 and earnings of £1.7m. On a mkt cap of £20m that is a p/e of just under 12x.

But consider what MIGHT happen to Dec 2025. Assume a drop down in sales growth rate to 30%, same gross margin. and a 10% rise in other expenses.

That is t/o of £13.6m, gross of £11.6m, PBT of £5m. Tax at 25% gives earnings of £4.0m

Thus a p/e of £20m/£4.0m = 5x.

All very rough, with a lot of assumptions, but why would that company, given the growth rate, the margin structure etc, not be on a p/e of say 20x to 30x. After all, Eagle Eye with a lower growth rate is on a p/e of 5ox for 2023 and 40x for 2024.

A possibility then, that at the end of 2024, 20 months away, a prospective p/e of 20x gives a 4 bagger, 30x a 6 bagger.

All supposition of course, things have gotta go well. But doesn't seem a bad bet to me. I give it a GREEN!!!

Obvs, i hold.

A postscript. William Currie sold a chunk of Eagle Eye a couple of months ago and in Feb, appeared on the Crimson Tide register as a 5% holder.

Roger Lawson

To quote "As they have already built up the infrastructure for increased sales, Finncap have expenses staying at about £6m for the next two years". Never knew a company growing revenue rapidly to freeze their costs. Does not happen in reality. Uninspiring historic record of aCrimson Tide (LON:TIDE) will also put of share buyers.

mbarnard

The price of Georgia is outrageously cheap. Net Asset Value is now 2103p so to buy them in at around 745p, they are getting them at close to a third NAV. They have a portfolio of defensive businesses like pharmacies, hospitals, medical insurance, schools and renewables as well as the 20.6% stake in quoted Bank of Georgia. I have bought 5,000 shares today taking my holding up to 86,000 shares. The buy backs will mop up loose sellers which should help to reduce the discount to NAV. Buying back shares at such a vast discount will increase the NAV even more for the remaining holders. Fair enough, Georgia is close to Russia but the risks are already built into Bank of Georgia who are on a prospective p/e of 3.5 and yield of nearly 10%.

WDWombat

I have avoided SOS and will continue to do so though I accept that they have a lively management, widening sales outlets and probably good products, though I don't approve of cheap, disposable textiles. At a market cap of £60mn a positive investor must be expecting £5mn net in the next five years at the very least and the share count has continued to climb dramatically. They may make it but it still seems pretty high risk to me, and when I did a simple comparison this morning - with Quiz, Boohoo and Asos - SOS didn't show up very well though they are (hopefully for holders) at a take-off stage.

Cockerhoop

planetx,

As an investor in SYS1, I'd love to pick your brains regards Stefan before I have to vote at the GM. I did a little digging at Companies House during the Wiggle/CRC period when he was the CEO but it's not completely conclusive. Turnover rose strongly (due to CRC being acquired) whilst profitability headed South.

I believe our mutual friend 'the boy Marsden' may have given you my number ;-) Would love to have a chat.

I also have long term holdings in a few other companies you appear to have been interested in including AVG & SOM & MSI.

Cheers

Patrick

abtan

Everyman Media (LON:EMAN)

Thanks Graham for your thoughts on Everyman Media (LON:EMAN)

I don't hold a position, but I do like to keep an eye on this one. I have a few additional thoughts:

---

If we exclude the £16m of expansionary capex (I am assuming this is all noted as "Assets Under Construction") then the group was actually cashflow positive in 2022. I calculate this as +c£3.2m for 2022.

It's not enough to fund the expansion, but certainly better than I was expecting.

Admissions/seat back in the old days of 2019 was 393/year i.e. every seat was sat in 393 times on average in the year - this is an estimate as new venues opened at various times during the year.

In H2 2022, this number was 314, so quite a drop and nowhere near back to previous highs.

The 2023 film slate looks quite good, commercially speaking (eg. Mission Impossible, yet another Fast movie, etc...) so I wouldn't be surprised if admissions crept up to their old levels. The expansion policy makes sense when I view the company and industry like this.

In addition to this:

food and beverage sales makes up a much higher % of revenues than in previous years, and;
Partnership revenues are continuing to grow.

There's a lot to like here and if the growth continues I personally think the business will rapidly approach an inflection point. It will be interesting to see how things progress in the coming 12-18 months.

planetx

Georgia Capital (CGEO)

Bizarre little 5% drop today .

Bank of Georgia underpins it and that’s rock solid today and has been the past week so struggling to see the reason .(is it ex dividend ?)

Anyway took the opportunity to ditch a big chunk of the David Montgomery personal behefit company that is the gravy train that is National World and moved it into Georgia Capital in the 730-740 range which just looks the wrong price (slow burn doesn’t move quickly ).

Also moved some more into J Smart co which is a deep value play bit a long slow burn one .

Plus increased on Titon Holdings again following the news Rockwood have bought out the 10% holder putting them on 20%, 8 million market cap for this looks silly as that’s about the value of the freehold .(not in accounts at current market value)

Georgia Capital drop ? Anyone any ideas ?

Aislabie

While it is going too far to call Crimson Tide (LON:TIDE) performance inspiring it is worth noting that they have increased their sales revenue for every year since 2016 and, if they meet the projections will, by end of 2023 have more than doubled their sales in three years which is acceptable even on small numbers, especially useful on a climbing ARR. Given its size it will be a great while before institutions take an interest but seems to me squarely in the area where the private investor can help spread the word.

There is a wider problem. I hold both Crimson Tide (LON:TIDE) and Argentex (LON:AGFX) another of today’s discussions. In both cases the companies appear to be reinvesting their cash in investments in people and products such that net profits are held down. They both appear to be doing this only to the extent that they do not imperil their companies with excessive gains in debt and are positioned so that the normal upsets of business do not threaten their future. So I applaud them (and hold both) and believe that we should recognise the reasonable acceptance of risk for the promise of return is something we should recognise as desirable (and unavoidably more tricky for the smaller company). I hope that the managements are not dissuaded by short-sighted investor moans.

timarr

Georgia Capital (LON:CGEO) drop ? Anyone any ideas ?

Perhaps the civil unrest in the country is having an impact?

https://www.theguardian.com/wo...

davidallen77

why has georgia capital moved from a primary listing to a standard listing?

move from primary listing to standard one?!

Given Sosandar (LON:SOS) are expecting to do £3.6m net this coming year WDWombat then an additional £1.4m in profitability over 4 years is a pretty low bar. If that's all they do from here I'd say they've failed miserably but no signs of that so far.

With £10m+ net cash and profitable there should be zero need to raise funds. Given the macro environment and number of black swan events they've had to adjust to in a very short space of time I find the level of sales and revenue growth they have achieved is quite remarkable and they really should be given a great deal of credit for that. In a benign operating environment you'd expect them to do even better. It is super clear that the brand they have generated resonates extremely well with the demographic they have targeted and I think that is further borne out by the clamour of marketplace operators (Next, John Lewis, Very, Sainsbury's) falling over themselves to get access to the Sosander product.

International is next and rather than go a capital intensive route they have opted to do this via a 3rd party which appears very sensible. That opens up a huge market but allows management to focus on what they do best - manage the brand and range.

I have no issue with your wish to avoid, not every stock is for every investor, but I think you're rather late to the party with "high risk" view on it. I'd have accepted that a year or so back when they were on the cusp but the brand is no longer at the very early prospective stage. It has a strong balance sheet, is profitable and expanding with a strong industry reputation.

quite a lot of unrest in the UK and US too...................

Tongue in cheek aside - most other Georgian stocks went up today so not sure that's anything to do with it. Announced a buyback though - market seems to hate those at the moment.

doubt a primary to standard listing had any effect. Shareholder register not really sensitive to listing segment changes.

In particular, the proposed Standard Listing will mean that the Company will not be required to comply with the
super-equivalent provisions of the Listing Rules that apply to companies with
securities admitted to the Premium Listing segment. The Board considers that
certain of these super-equivalent provisions impose onerous obligations on the
Company that are affecting its ability to efficiently pursue its strategy.

In particular, the requirement pursuant to Listing Rule 10 to obtain prior
shareholder approval for significant transactions (acquisitions and
disposals), creates material impediments to the Company's pursuit of its goal
to monetise its investments. The delay and uncertainty associated with the
need for GCAP to obtain shareholder approval for significant transactions
discourages potential buyers and reduces their willingness to engage in the
sales process, including familiarizing themselves with the targeted portfolio
company and the Georgian economy, performing due diligence and the like.
During the sale of 80% equity stake of the water utility business, we observed
that international buyers were especially surprised to learn of a shareholder
approval requirement given the relatively modest size of the transactions in
absolute terms in relation to any number of larger transactions in the
international markets where no shareholder approval is required.

Albertos

Not sure David you might just be picking up two aberrations.

I held Tremor International (LON:TRMR) until 7/3/23 and after looking at the final results sold on the bell in complete exasperation/disgust - luckily I got out at just over £3/share - they then fell down to the £2 level. The end of the buyback program and the SP rise since I think has more to do with the fact that people think the SP can't go lower - I'm not sure.

I hold Georgia Capital (LON:CGEO) and was very surprised by the SP reaction today. It is classic logic for investment trusts, that when the discount to NAV becomes too much and you have spare funds then buybacks are a good idea to reduce the discount. I know Georgia Capital (LON:CGEO) is not exactly an investment trust but as of tonight £273m of its market value of £332m is supported by its shareholding in Bank of Georgia (LON:BGEO) and given that, overall, its now trading at a discount to 31/12/22 NAV of 63%, a buyback seems totally logical. There has never been any talk of a dividend as far as I'm aware.

So perhaps there's something else at work here . Did the market expect a bigger buyback, especially after the hotel disposals netting $28m.

Anyway I topped-up. Could be right, could be wrong (especially in this market).

Paul Scott

15th Apr '23

Brilliant reply, thank you David!

I would like to clarify one other point from WDWombat, who said -

though I don't approve of cheap, disposable textiles.

That's not at all accurate for Sosandar (LON:SOS) - it sounds like you're getting muddled up with Boohoo (LON:BOO) or Shein (who seem to be eating the lunch of the fast fashion UK companies).

Sosandar product is better compared with mid-market brands. It's fashionable, but definitely not wear once & throw away fast fashion.

I think what we're seeing with Sosandar, is the success of a powerful new brand. It's now moved into profit, and with international growth through partners, the sky's the limit for future growth, with no need to tap shareholders again, given it's profitable and has £10m cash in the bank.

Full disclosure: I've been saying for ages here that I want to buy back in, and finally took the plunge on Friday. Painful, as I had to top-slice other things that I didn't want to sell, to raise some cash. But such is life.

Regards, Paul.

BnB

Sosandar (LON:SOS)

In relation to Sosander, Paul, you were asking in your excellent podcast about Global-e Online and whether any contributors could add comment. The company is one of my holdings, an Israel-founded facilitator of cross border e-commerce. They provide a local experience to consumers around the world, regardless of the abode of the selling company. Growing like a weed, with a massive runway, the easiest way to think about it is as an international Shopify. In fact Shopify is the biggest external shareholder in the business. The service is extremely good and the association with Sosander could greatly support the latter’s international expansion.

Hope that helps.

stevenhume

1st Aug '23

LON: SED I am posting with the benefit of some hindsight (August 2023). I think you are being a little harsh in your dismissal of this company. Seems to me they are achieving a massive amount in a short time in terms of new contracts and all the management work required to support that i.e. new production lines, staff recruitment, commercial contracts with partners etc., I am impressed by the management (Tony Gott in particular). It remains to be seen though how all the activity will actually convert into profits. Time will tell.

Small Cap Value Report (Wed 12 April 2023) - SED, SOS, SYS1, EMAN,DLAR

Summaries of main sections

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Paul Scott

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