Small Cap Value Report (Wed 11 Sep 2019) - BOTB, SFOR, EPWN

Hi, it’s Paul here.

Good morning! I’m settling into a pattern of writing from late morning, through to tea time, which works best for me. Therefore today’s report estimated time of completion is 5pm.

I see we have 1 or 2 subscribers who insist on giving each report a thumbs down, every day, late morning, presumably because they are displeased that the report isn’t complete by then. We agreed some time ago (overwhelmingly supported by readers at the time) that I would take my time writing these reports, and not rush for any deadline.

Therefore if you want to see a completed report, then please come back at the indicated (above in bold) completion time. Thanks.

Share price: 288p (up 6% today, at 11:12)
No. shares: 9.38m
Market cap: £27.0m

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

Trading update (AGM statement)

Best of the Best PLC, (LSE: BOTB) the online organiser of weekly competitions to win cars and other luxury items…

Trading seems to be going well;

The Group is pleased to report that the positive momentum to the start of the year, reported at the time of the full year results in June, has been maintained and the Company has continued to make good progress and is trading comfortably in line with market expectations for the current financial year.

I’m not a fan of the phrase “comfortably in line”. Surely that must mean: slightly ahead? In which case why not just say so?

The last physical airport site has now gone. Therefore BOTB is now an online only business, which makes it simpler to manage. The physical sites had a different business model – high ticket prices, as one-off purchases. So that wasn’t really compatible with the online model of much cheaper tickets, to encourage frequent purchases by customers.

Note that the gradual closure of the physical sites in recent years actually masked the stronger growth coming from online operations. With those sites now all gone, this means that the top line growth rate could now accelerate – a trigger for a possible re-rating, perhaps?

Valuation – the latest house broker note (available on Research Tree) shows 17.0p for FY 04/2020. Although it notes today that there’s possibly upside on that, given today’s favourable RNS. That’s a PER of less than 16.9 - which strikes me as excellent value, for a small, but decently growing, profitable amp; cash generative online business, with recurring revenues, that operates in a niche of its own. Its market is global, now it’s online only, so there’s almost limitless growth possible.

My opinion – I remain a happy, long-term shareholder here. The company has paid out loads of dividends in recent years, including specials. In drawing sensible salaries too, management has proven thoroughly decent, by treating minority shareholders fairly. Therefore I trust management to look after my amp; other small shareholders’ interests. That matters a lot, as there are plenty of rogues around on AIM, as we know.

An adverse tax ruling has dented forecasts a little, but the company seems to have taken that in its stride (meaning that underlying growth is stronger than reported growth). Marketing spend can be dialled up amp; down as required, so the business is nicely set up, in the event of a recession. I get the impression that management is learning amp; improving what online advertising works best.

It’s a pity the shares are so illiquid, so it takes time to build up, or unwind a shareholding here. 

The valuation currently looks very appealing to me – it’s a GARP share (growth at reasonable price) in my view.

Share price: 139.25p (up c.1% today, at 12:15)
No. shares: 365.1m
Market cap: £508.4m

Interim results

About S4Capital

S4Capital plc (SFOR.L) is a new age/new era digital advertising and marketing services company, established by Sir Martin Sorrell in May 2018.

Its strategy is to build a purely digital advertising and marketing services business for global, multinational, regional, local clients and millennial-driven influencer brands. This will be achieved initially by integrating leading businesses in three practice areas: first-party data, digital content, digital media planning and buying, along with an emphasis on “faster, better, cheaper” executions in an always-on consumer-led environment, with a unitary structure.

This one is a bit bigger than the usual companies I look at, but the Martin Sorrell factor makes it particularly interesting;

Sir Martin was CEO of WPP for 33 years, building it from a £1 million “shell” company in 1985 into the world’s largest advertising and marketing services company with a market capitalisation of over £16 billion on the day he left.

Therefore, his latest venture, S4 Capital is being closely watched. Sorrell is very scathing about conventional marketing, saying that it’s had its day, and digital is the only area of interest to him now.

I looked at its last few trading updates, and thought they sounded a bit rampy, trumpeting top line growth, but saying little about profitability. Hence I decided to reserve judgement until the next figures are issued, which has happened today.

Interim results - 

Revenue growth is strong;

Revenue was £87.97 million, up 41.6.% from £62.13 million on a pro-forma basis in the comparable period in 2018 pro-forma.

Operating profit – this is where it gets tricky to analyse. The statutory figures show a big deterioration from a profit of £12.2m last time (pro forma, to strip out the effect of timing of acquisitions), to a loss of -£6.2m this time.

Adjusted profit – there are nearly £15m of adjusting items, which improves this year’s H1 to an H1 adjusted operating profit of £8.7m (although even the adjusted figure is down on last time’s £12.3m). The company explains that it is in a dash for growth, hence is loading up on headcount to achieve further growth.

Adjusting items – are highly material, so needs scrutiny, see note 1 to today’s accounts. These are the adjusted items;

Amortisation charge relating to acquisitions of £6.3m. That’s fine to adjust out, in my opinion, and this is standard practice with most acquisitive groups. The book entries for goodwill amp; amortisation are irrelevant when it comes to valuing a company amp; assessing its underlying profitability.

Non-recurring expenses of £8.7m is the balance of the adjustment to profits. So what’s in this total? Sub-note 1 tells us;

Non-recurring expenses relate to the total expenses for acquisitions of £ 7.4 million and share based compensation of £ 1.3 million. In addition, there is a (deferred) income tax credit of £ 1.3 million.

Since the group has been making large acquisitions, then expenses of £7.4m sounds reasonable to me.

The only item I normally quibble over, is share based compensation, which is really remuneration, and should therefore be expensed, in my view. But £1.3m is not terribly significant relative to the total figures.

Overall then, it seems to me that the adjusted profit is probably acceptable as a means to measure performance amp; valuation.

(work-in progress – estimated completion time 5pm)

Epwin (LON:EPWN)

Share price: 

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