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Small Cap Value Report (Thu 11 Feb 2021) - SUS, GMR, THS, TED, SHOE

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Good morning, it’s Paul amp; Jack here with the SCVR for Thursday. Jack has written most of today’s report, many thanks for that, which gave me a bit of a break, after a manically busy year so far.

Timing – I (Paul) will be writing more sections this afternoon, so we should have a full report up by about 4pm.

Agenda -

Jack’s Section:

Samp;u (LON:SUS) (Jack holds) – trading update FY 01/2021 from this motor amp; specialist lender

Gaming Realms (LON:GMR) – Trading update for FY 12/2020

Tharisa (LON:THS) – AGM statement from this S.African miner

Ted Baker (LON:TED) – Incorrectly titled “Notice of Results” – this is actually a Q4 (ending 30 Jan 2021) trading update

Paul’s Section:

Shoe Zone (LON:SHOE) (I hold) – Also incorrectly titled, “Date of Final Results” – this is actually a trading amp; liquidity update

Jack’s Section Samp;U (LON:SUS)

Share price: 2,200p

Shares in issue: 12,133,760

Market cap: £267m

(I hold)

Samp;u (LON:SUS) is a sensibly-run, profitable operation with a good growth track record trading at a modest multiple. There will always be question marks around credit lending but from everything I’ve seen, Samp;U appears to act in good faith, puts a lot of work into vetting the financial quality of its customers, and seeks to build sustainable relationships.

The company was founded in Birmingham in 1938 and grew steadily before floating on the stock exchange in 1961. In 1992 it expanded its home credit loans business with the acquisition of Wilson Tupholme before founding Advantage Finance in 1999, which has grown to become one of the UK’s leading specialist motor finance providers. Home credit loans was sold in 2015 for £82.5m, and then Aspen Bridging was launched in 2017 to provide property bridging finance for individuals and business borrowers.

So today the group has two trading subsidiaries. Advantage Finance offers loans of up to £15,000 for car deals and accesses its market through brokers, direct to dealers and through re-finance from loyal customers. Aspen Bridging lends up to £2m per deal with an average loan of £500,000 to the property refurbishment market.

Lewis Robinson wrote a great blog post on Samp;U last year (here). It spurred me on to investigate more closely and take up a starter position as the management sounds canny and prudent. And why wouldn’t they be? The Coombs family makes up quite a lot of the Major Shareholders list.

The bottom line is Samp;U has steadily grown earnings per share over many years, with no shareholder dilution in the past six years. While 2021 will likely bring an end to this EPS growth run, the longer term direction of travel looks to be positive.


It fares well across the StockRanks and is classified as a Super Stock, so it looks like the algorithms are telling us something as well.


Trading statement

This is a trading update for the period from 9 December 2020 to the group’s year end on 31 January 2021.

It’s mostly text, so here are the key quotes:

The Group’s trading remains robust and profitable… Demand by customers in both divisions remains strong and collections quality continues to be good.

We are planning for a significant rebound to pre-Covid motor finance transaction levels as lockdown restrictions ease this year, and a substantial increase in business at the Aspen property bridging business.

Borrowings have fallen to £99m from £103m and gearing is down to 55% from 58%, reflecting cash generation at Advantage partially offset by additional investment in Aspen. Samp;U is also providing a second (reduced) interim dividend this year of 25p per ordinary share (2020: 36p).

Motor Finance

In the past 2 months new deal transactions have reached nearly 80% of the comparable period last year and this is increasing. Record application numbers continue and Advantage’s new deal transactions for the year as a whole total around 15,600 with customer numbers at year end of just under 63,000 and net receivables of around £247m.

Repayment quality remains good and Advantage talks of the ‘sustainable relationships’ it has with customers. The number of payment holiday has reduced from 15,000 at the peak to below 4,000, and in January monthly collections improved to 90% of contractual terms due.

So it does seem as though Advantage’s customer analysis and product range help create a well-received and swiftly recovering credit service. This segment’s latest Trustpilot consumer rating was 4.8 out of 5.0.

Aspen Bridging

Aspen has seen net receivables rise from £29.6m to around £34m in the period, with new transactions consistently beating budget. The deal pipeline here has more than doubled and Samp;U has invested a further £4m in the division over the past two months. Looks to be quite a lot smaller than Advantage for now.


Earnings will likely be hit in FY21 but I continue to have a favourable impression of this company. The management team seems engaged and aligned with shareholders. There is a track record of profitable growth and double-digit returns on capital (under more ‘normal’ circumstances). And it looks like there is good growth potential, too, combined with a modest forecast earnings multiple of 13.5x.

An economic recovery won’t be a straight line upwards but prospects, on balance, look brighter than they did six months ago and well-run, prudent companies like Samp;U will likely still be around to capitalise. As you might expect from a family firm, there has been no shareholder dilution over the past year. In fact none over the past six years – again suggesting an operation that is sensibly run for shareholders.

Gaming Realms (LON:GMR)

Share price: 33.9p

Shares in issue: 287,092,375

Market cap: £97.3m

Gaming Realms (LON:GMR) is a stock with some buzz about it.

A Financial Summary that is a sea of red losses, combined with low revenue versus the market cap (albeit with good forecast growth), and consistent cash burn have ruled it out for me so far but congratulations to holders. This kind of riskier high-growth proposition is where you can hit it big if you have the conviction.

Of all the losing ‘Styles’, Momentum Traps are the most likely to outperform. And GMR has indeed been on a strong run.


The company develops and licenses mobile gaming content, and owns the Slingo brand and IP. Some of you might know it – it is ‘one of the world’s most well known game formats’. Successful gaming IP can be a tremendous asset, sometimes undervalued even at conventionally eye-watering price/earnings multiples.

And it does look as though GMR occupies a promising position in a large and growing international market. Slingo is advertised almost as a new genre of games, which is novel. I don’t have any insight into whether or not this is true, as I have never played these games. If the group is correct in that there is massive demand for its Slingo games then GMR could have a scalable platform for rapid growth.

It is certainly winning a lot of contracts, which is intriguing. It is not yet cash generative though, and the low Z-Score rightly flags up liquidity and profitability concerns.


Trading update

That aside, this is a short but positive update for the full year to 31 December 2020.

FY20 revenue and adjusted EBITDA are expected to be c.£11.2m and c.£3.1m respectively, reflecting a ‘record month in December due to the Company’s content licensing business, which has continued to go from strength to strength.’

That looks to be a useful revenue beat versus FY20 forecasts of £10.8m and broker notes suggest previous adjusted EBITDA forecasts of £2.7m, so that record December really looks to have knocked it out the park.

The licensing business grew by over 100% during FY20, launching with 26 new partners, including Tier 1 operators DraftKings in the U.S., as well as Sky Betting and Gaming and PaddyPower Betfair in the UK and Europe.

That positive momentum reported above has continued into the start of FY21, with new launches of its Slingo content in Italy announced with both Goldbet and Sisal. Key contracts in the US, including a multi-state contract with BetMGM to provide content through a direct integration.

GMR has also been granted a provisional supplier licence by the Michigan Gaming Control Board, which will allow all Slingo Originals content to be provided to Michigan’s licenced online casino operators. This licence, alongside its existing New Jersey licence, will further strengthen Gaming Realms’ US operations, where it is continuing with the application process for a licence in Pennsylvania.


The growth prospects are promising, and with this type of valuation they should be. Twenty-six new licensing partners in 2020 plus market entry into Michigan, Pennsylvania, and Italy in 2021.

There could be some regulatory risk here, with the UK Gambling Commission recently introducing new regulations. It looks to have had little impact on GMR, but there’s always the chance further regulation does affect its operations.

At c£100m market cap, that puts the company on 20x FY21 adjusted EBITDA (forecast to be £5m, having been raised up from £4.5m on the strength of this update). That could still prove to be a bargain if future growth is exceptional but I don’t yet know if that’s the case.

What I can say is revenue looks to be accelerating and there are some substantial, nailed on growth catalysts, so there’s plenty of scope to continue surprising to the upside. There’s probably some punchy operational gearing here as well, so it’s definitely worth a closer look.

And with software companies, it pays to do further due diligence on things like capitalised development costs. The balance sheet isn’t the strongest either, so the company needs to start translating its profits into meaningful cash generation soon.

Tharisa (LON:THS)

Share price: 128.7p

Shares in issue: 268,476,314

Market cap: £345.5m

(I hold)

Tharisa (LON:THS) is a low-cost platinum-group metal (PGM) and chrome co-producer which operates the Tharisa mine on the south-western limb of South Africa’s Bushveld Complex. This mine has an estimated open pit life-of-mine of approximately 14 years, and a further estimated underground life of mine of approximately 40 years.

It’s in the Stockopedia Investment Club, so you can read the full pitch here. As with Sylvania Platinum (LON:SLP) , the company looks very cheap but this has a lot to do with the tremendous strength in PGM spot price (and Rhodium in particular), so these companies have commodity price risks to consider. But PGMs are indeed in high demand as a result of entrenched environmental trends.


Potential taxes are also a concern.

AGM statement

The key quote is:

Demand for our commodities remains extremely robust and with industry leading exposure to the PGM basket price, we remain confident that the operational performance will translate into healthy financial results, as was already evidenced at last year’s results. Pleasing too, is the strong increase in prices for metallurgical chrome, whose price was lagging those of other steel commodities.

But there is also some comment on the South African government’s proposed export tax for chrome. The group says ‘this proposed tax will not provide lasting or coherent support to the ferrochrome industry and the only sustainable and viable aid to this downstream industry is subsidised electricity pricing.’


Tharisa is a riskier stock with both upside and downside potential.

The proposed tax is something to keep an eye on. As a general point, these South African PGM producers stand to make some fantastic profits if PGM spot prices remain at current levels, so it is a risk that authorities will look to take a slice at some point.

The political environment is a concern here and jurisdiction, as ever, is an important risk factor.

There are also a couple of interesting AGM votes to look into.


But here’s the 15y chart for platinum, palladium, and rhodium prices. This is probably the most important single point for Tharisa.


Whether these spot prices are a new normal driven by changing demand around environmental sustainability, or are simply a bubble, is key to the investment thesis.

Edit – Johnson Matthey commented on platinum, palladium, and rhodium on 10th of Feb:

Supply shortfalls have driven rapid price gains, with platinum trading at six-year highs and rhodium and palladium close to record levels. A shortfall is expected for palladium and rhodium this year as well, the third consecutive annual deficit for rhodium and the tenth for palladium, Johnson Matthey researcher Rupen Raithatha said.

Platinum may see a third consecutive annual deficit in 2021, depending on how much metal is stockpiled by investors, he said.

All three metals are used in catalytic converters to reduce harmful emissions, and tightening environmental regulation is forcing auto makers to put more into each vehicle. Platinum is also in demand by other industries, for jewellery and as an investment.

End of edit.

And then there are the risks to consider, as outlined above. So a cautious relative valuation is probably deserved and there are obvious risks, but even so the disconnect between share price and current PGM prices is stark at present.


Ted Baker (LON:TED)

Share price: 100.2p

Shares in issue: 184,608,786

Market cap: £185m

Today’s Q4 trading update was mislabelled ‘Notice of Results’ this morning.

Ted Baker (LON:TED) fell from grace quite spectacularly a couple of years ago, the share price down in flames amid tumbling profits and allegations of unwanted hugging. It was quite the story.

Since then, a new management team has been enacting a turnaround strategy. I took a closer look back in November (here) and left unconvinced. It seemed as though a lot of ‘turning around’ had yet to take place and management targets might not imply that much share price upside after the enormous dilution caused by last year’s steeply discounted fundraise.

Marks And Spencer (LON:MKS) looked a better (though still imperfect and risky) contrarian retail bet given its resilient free cash flows and long operating history. It also has a less dramatic (but still vitally important and complex) turnaround to execute on.

Since then it’s interesting to note that MKS was outperforming until its recent share price slide, while TED has underperformed the market.


Q4 update

Q4 highlights:

  • Revenue fell year on year by 47%, with a ‘material negative impact from the COVID pandemic.’ Store closures have been an issue and, when stores were open, footfall shifted towards out-of-town and neighbourhood retail locations. There has also been a decline in outerwear and occasionwear demand during the Christmas period.
  • Splitting this out, Retail sales fell 47% due to temporary and ‘selective permanent closures where commercial lease agreements could not be reached with landlords.’ eCommerce sales decreased 1% and represented 63% of total retail sales (2020: 33%). Wholesale and licence revenue decreased by 44%.
  • The China, Hong Kong and Macau JV continues to see robust sales growth, with 14% sales growth during the period and 33% on mainland China.
  • Net available liquidity was £199.7m comprising £66.7m of cash and £133m of bank facilities. The Group did not draw on any bank facilities during the period and the Group has material liquidity headroom against anticipated peak cash requirements in September/October 2021.

TED mentions a new eCommerce platform, ‘which will significantly improve functionality and flexibility’ remains on track for launch at the end of Q1 2021. But still, to register a decrease in online sales at this moment is slightly concerning.

Good progress has been made in cost savings: annualised saving of £31m and rent savings of £3m in line with upgraded targets. However, there will be up to £5m of incremental costs associated with Brexit, reflecting extra duty and shipping costs.

Meanwhile, trading continues to be impacted by COVID-related restrictions, with ‘material negative impact from physical store closures across Retail and Wholesale channels.’ TED now assumes an ongoing materially negative impact across both channels from store closures until end May 2021, followed by a phased recovery until the end of the first half.


If TED can last through this tough period, the prize is a less competitive High Street with much lower rents. And planning for channel and store closures until the end of May 2021 seems sensible as things stand today.

But online should be a promising growth avenue and yet, somehow, sales have not grown here.

There’s brand value, of course, but brands can fade. Especially in fashion (although TED does present itself as a ‘global lifestyle brand’). But the risks are severe and I feel as though TED’s position is more precarious than management is letting on.

There is a disconnect between the upbeat management tone and tough trading results. Management’s task of executing this turnaround in the face of a once-in-a-lifetime global pandemic is not one to be envied.

Perhaps they’ll pull it off, but I have a blanket rule right now to steer clear of companies that had pre-existing issues before Covid. If I held shares, I would be very mindful of the risks, my exposure, and be braced for the real possibility of permanent loss of capital if things took a turn for the worse.


Shoe Zone (LON:SHOE)

(Paul – I hold)

55p (down 4%, at 12:42) – mkt cap £27m

Date of Final Results

Good thing I checked, as this update is a lot more than just giving the date of the results. They did the same thing on 26 Nov 2020 here.

28 Oct 2020 I reported here on its full year trading update, where guidance was for a loss before tax of £10-12m.

Diary date – final results for 52 weeks ended 3 Oct 2020 will be released on 8 March 2021

Revenues - £122.6m, down 24% on LY, as previously guided

Revised guidance today – a statutory loss before tax of £(14.6)m is worse than the £10-12m previously guided due to IFRS 16 lease adjustments. Not anything to do with trading, so that’s fine.

Liquidity update - this is reassuring -

As previously announced, the Group continues to have a material net cash balance sheet position, and the Board continues to anticipate that the Group has sufficient liquidity available to it, assuming there are no further material COVID-19 related restrictions mandated by the Government over and above those already known.

My opinion – I’m not bothered about IFRS 16 adjustments. It’s a really bad accounting standard, that messes up Pamp;L, balance sheet, cashflow statement, and net debt reporting. The sooner it’s repealed, the better. All we need is some disclosure on leases in the notes to the accounts, in particular onerous leases. The old system just needed a tweak, not a complete overhaul. Therefore the value of the shares doesn’t change, just because IFRS 16 requires a larger write-down.

A CFO for another company walked me through the impact of IFRS 16, indicating that it will savage balance sheets being reported now, but as the economy recovers, then we should see the balance sheet deficit on leases (low imaginary asset, and high liabilities) reduce sharply, as trading becomes viable again from most sites. Therefore care is needed with these numbers.

The liquidity situation sounds OK, and I don’t have any concern about SHOE’s solvency. If you think (as I do) that retailers should be able to open up again quite soon, then there could be nice further upside here. My notes here on 28 Oct 2020 indicated that I saw 100% potential upside on this share from its then price of 36p, quite a bold call. We’ve recovered to 55p already, which is up 53%. Oh, we’re halfway there. Let’s hope I’m not just living on a prayer!

I hope management don’t buy the business back on the cheap, before we’ve had a chance to see more upside from a re-opening of retailers in the coming months. With most of the vulnerable already vaccinated, and hospital numbers falling rapidly, I don’t see how the Govt can keep restrictions going for much longer. Hence for me, the re-opening trade is very much alive, and I think SHOE is a good way to play it. Allowed to trade normally, it should return to being a decently profitable business. Although management is heavily downplaying the potential for future divis, I think they want to greatly strengthen the balance sheet, having been scared by the impact of covid shutdowns.

I’d like to see a greater focus on growing online sales.

NB the broker consensus forecast numbers are outdated, so ignore them.




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