Small Cap Value Report (Tue 9 Nov 2021) - ANG, SOS, ALFA, CRPR

Good morning! It’s Paul amp; Jack here with the SCVR for Tuesday.

Agenda -

Paul’s Section:

Angling Direct (LON:ANG) – cyber-security attack from yesterday’s RNS. Looks quite serious, we’re now into day 4 of ANG’s transactional website being down. It was hacked, and customers have been redirected towards PornHub. Plenty of banter has ensued, but will it do lasting damage?

Sosandar (LON:SOS) – I recap on this very fast-growing womenswear fashion brand, after an excellent presentation last night at Mello. It’s not cheap, but the growth is now stellar, and I reckon they’re set up to beat forecasts this peak trading period, driven partly by strong third party sales. Looks an exciting growth company to me – measured by facts amp; figures, not just wishful thinking!

James Cropper (LON:CRPR) – interim results look OK, with a good recovery in revenues, and a modest increase in profits. Note the pension deficit. I can’t see anything to get excited about in these numbers.

Jack’s Section:

Alfa Financial Software Holdings (LON:ALFA) – strong momentum continues. This software provider is of increasing interest to the community and broker EPS forecasts have been upped multiple times recently. Shares look pricey but, with the wind in its sails, the group deserves some kind of premium.

Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to review trading updates amp; 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 amp; 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.

66.5p – mkt cap £51.4m

Cyber security incident

This announcement came out yesterday. Many thanks to gus1065 for flagging it in the comments section. We’ve seen quite a few cyber attacks on companies in recent years, including ones I remember being Cake Box Holdings (LON:CBOX) and Nwf (LON:NWF) – both of which seemed to be dealt with fairly quickly amp; without excessive cost or disruption to the business.

I’m a bit more concerned about the cyber attack against ANG because its transactional website is a large part of its operations. If that isn’t properly protected, then the business has a serious vulnerability. It said this yesterday -

Angling Direct PLC (“Angling Direct” or the “Company”), the leading retailer of fishing tackle products and equipment, announces that it is currently managing a cyber security incident after detecting unauthorised activity on its network late on Friday 5 November 2021. This unauthorised activity shut down the Company’s websites and these remain inactive. Some of the Company’s social media accounts have also been compromised.

I’ve just checked, and we’re now on day 4 of the cyber attack, and ANG still hasn’t got its websites up amp; running, there’s just an error page.

The hackers stated, through Angling Direct’s Twitter account (which they took control of) that all customer details have been sold – as follows -

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Social media is buzzing with what seems to be good-humoured banter about this incident, but the longer this downtime goes on for ANG’s transactional websites, then the more damage it could do – e.g. some customers are asking on social media if ANG has gone bust?

I thought this re-imagining of ANG’s logo in Pornhub’s colours (so I am told) is rather amusing (from Facebook) -

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The announcement from yesterday goes on to say -

The Board has appointed external cyber security specialists whose investigations are underway to establish what happened. Work continues round the clock to bring the websites back online while our 39 retail stores across the UK have remained open and continue to trade.

My opinion – clearly this is embarrassing, and highlights that ANG doesn’t have adequately protected IT systems. It could be expensive to sort this out, but ANG has pots of cash in the bank – possibly why it was targeted? Whether to pay the ransom? That’s always the quandary isn’t it?

Is there a risk of a class action against ANG from customers whose details have been sold by the hackers? I don’t know, but it must be a risk. Maybe ANG should send all its customers a gift voucher to apologise? IT security isn’t cheap to sort out either, so the costs could run into the hundreds of £k’s, or even low millions, who knows?

It’s a pity, because ANG shares were twitching away, like live bait, on my watchlist. It looks a fairly decent company, although note forecasts are for a reduction of profits once Govt support measures are phased out (it’s been a big beneficiary from the business rates holiday, for example).

Other investors might see this as a potential buying opportunity – the cyber problem is likely to be fixed fairly quickly, and most men are aware that pornography exists on the internet, so how many are going to be genuinely shocked? More likely it will prove a rich source of jokes for some time to come.

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32p (up 3%, at 08:21) – mkt cap £70m

This womenswear brand appeared on Mello last night, with the joint CEOs and CFO doing a very good briefing, and Qamp;A. I jotted down a few key points, so am sharing this with you below. NB the full briefing covered a lot more ground, so these are just particularly noteworthy points below -

40% of revenues now come from emails to the customer database – almost cost-free

Cost of customer acquisition has more than halved to £20-25

Lifetime value of customers? CFO wouldn’t be drawn on this, saying it was too early stage. I was a bit surprised at that, as LTV is a key metric that is used to create a LTV/CAC metric, a key KPI for all eCommerce businesses. Although LTV is always just an estimate, so personally I don’t place too much reliance on it.

Supply chain – “no material impact” – “well stocked”, and “great visibility” of stock intake over peak trading period.

Some upward pressure on cost of products, but has been offset by ordering larger quantities – economies of scale.

Greatly increased stock at key 3rd parties (Next, Mamp;S, and John Lewis – all of whom approached Sosandar, wanting to stock its distinctive ranges)

Great start to this FY (03/2022). “Well on road to profitability”

Question about stock clearance – “Stock is selling so fast, we don’t need to clear stock elsewhere”. Also test amp; repeat business model limits problems from slow selling lines.

Returns rate? CFO refused to give a figure, just saying it has “normalised” from artificially low levels during pandemic. I wasn’t keen on this. The company has given returns rate in the past, so stopping doing so struck me as not ideal.

“Only scratched the surface” of third party, and own website sales – i.e. plenty more market share to go for.

Sourcing? Turkey amp; India are now the biggest. China, and others also.

My opinion – I jumped the gun with this share, buying it far too early, at the original IPO, when it was little more than a startup. With hindsight, that was too speculative, hence a mistake. For a couple of years things looked a bit dicey – strong growth, but heavy losses and repeated fundraisings.

However, something changed seriously for the better earlier this year. Revenue growth has gone through the roof, and broker forecast is for c.£24m revenues this year, and close to breakeven. I reckon that forecast could be smashed, with £25-30m looking far more likely to me, if you extrapolate out from the interim actual results, and apply the usual seasonal uplift for peak H2 trading. Hence I suspect the company is probably already profitable.

Trading on the 3rd party websites seems to be really taking off, and this is guaranteed profits, due to the way the deals work – SOS makes about 55-60% gross margin, and the websites charge a c.38% fee. The rate of stock turn is very high, so there’s considerable customer demand for SOS’s differentiated products, carefully targeted mainly at over-30 women, who want stylish, but flattering clothes – an underserved niche.

Valuation? £70m market cap is certainly not cheap any more, but this reflects the stellar growth being achieved, and the likelihood that this is now a profitable business.

All in all, an excellent presentation, and I’ll be sitting tight on my SOS shares for a long time – it can be a terrible mistake to sell out, just when a company has turned the corner, as the best is often still to come.

Note how the StockRank system is also reflecting SOS coming of age as a proper company, no longer blue sky.

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1365p (up 11% at 109:09) – mkt cap £130m

Half-year Report

This is another interesting small cap chart, like so many others – which fell sharply in the seemingly indiscriminate drops in Sept/Oct this year, but is now bouncing back strongly. It’s very difficult to know how to handle market corrections like that – do you follow the sellers, assuming something must be wrong? Or do you ignore it as background noise? I’m definitely leaning towards the latter.

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If I’m invested in a decent company, with good long-term fundamentals, then I won’t be panicked into selling, even if the price falls sharply. That’s when stop losses can be an absolute menace, closing you out of things due to normal market volatility, hence why I don’t use stop losses personally. Although there’s arguably a good case for new investors using stop losses, and they can be handy for speculative shares where there’s little fundamental backing to support the price – which are often the sort of story stocks that new investors congregate in.

Another point to consider, is that right now, I think some investors have sold due to the uncertainty over supply chains issues, inflation, and energy costs. Therefore it makes sense that those shares would recover quickly once the market is told that supply chain issues are under control.

All of the above is exacerbated by the dynamics of UK small caps, in that the prices tend to be very volatile, and can move a lot, on quite small volumes.

Back to Cropper.

The advanced materials and paper products group is pleased to announce its Half-year results to 25 September 2021

I reviewed Cropper’s FY 03/2021 briefly here in June, but couldn’t see much to get excited about, and there wasn’t any proper guidance from the company.

Revenues for H1 this year are up 46% to £49.8m – no big surprise there, as prior year comps are the period that was hardest hit with lockdown 1 in 2020.

Adj profit before tax of £2.3m doesn’t strike me as much of an uplift on £1.3m in the prior year’s H1, I would have expected a much larger increase in profits, for such a big increase in revenues.

Interim dividends reinstated.

Capex has resumed, to increase future production capacity.

The “Colourform” packaging products sound interesting – plastics-free, very current, and a nice potential growth area. That reminds me of Zotefoams (LON:ZTF) which we looked at the other day, which also has a new product for environmentally clean packaging. Colourform was only £1.7m revenues in H1, so early days.

Outlook - rather vague again, with the key bit saying -

In the nearer term, the full-year results are anticipated to show strong growth from the pandemic.

Balance sheet – looks fine to me, although note there is a £17.1m pension deficit.

Remember that real world cash payments into pension schemes can often be far worse than the accounting deficit suggests. So whenever final salary pension schemes exist, it is essential for investors to check the notes to the last Annual Report, to fully understand the situation.

There can be a lot of potential risk with pension schemes, given that interest rates, and inflation seem to be areas of considerable uncertainty at the moment.

My opinion - I can’t see anything particularly interesting in the numbers, or the valuation.

Maybe investors are betting on product innovation driving future growth? Perhaps holders of this share could tell us why you rate it, in the comments section? It’s good to pool our knowledge.

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Jack’s section Alfa Financial Software Holdings (LON:ALFA)

Share price: 209.3p (+7.33%)

Shares in issue: 300,000,000

Market cap: £627.9m

Alfa Financial is a leading developer of mission-critical software for the asset finance industry. Shares remain down on where they listed a few years back.

But the trend is improving and Alfa has been getting interest from the community. Brokers have also been consistently upping their EPS estimates, so this is very much a stock on the move.

Q3 trading update

Revenue in the third quarter was strong at £20m, significantly ahead of £16m for the same period last year with high levels of chargeability which has continued through October. Cash generation has remained strong.

Delivery performance has remained excellent. Fifteen successful go-lives of Alfa Systems had been delivered at the time of the half year results in September, and this has now increased to 23.

The pipeline has gone up from seven at the half year stage to eight currently, with a ‘large prospect in Europe’ added. TCV (‘Total Contracted Value’) has risen from £125m at 30 June 2021 to £128m at 30 September 2021.

Outlook – Alfa now expects to exceed revenue estimates for 2021 by a further c3%.

Andrew Denton, CEO, said:

This has been an outstanding quarter in what has been an outstanding year for Alfa. We are delighted to see continued good progress across all areas of the business. Already this year more new customers have started using Alfa Systems in more geographies than any year in our history… we continue to have growing confidence in the outlook for the business.

Conclusion

There have been some slip ups in the past but Alfa appears to be hitting its stride, with analysts clearly struggling to fully price in the change in trajectory. The group clocks up some good quality metrics and is flagged as a top QM stock.

But the valuation is expensive. With this kind of stock, it depends on how big the market is and how well the products are placed to take share. ‘Expensive’ isn’t necessarily always expensive if future cash flows are set to grow substantially over the long term.

Nevertheless, while it’s hard to argue against the direction of travel, the upside has diminished somewhat.

It all depends on the earnings potential though and it’s still worth investigating the size of the opportunity given the strong momentum. It looks like a good business – perhaps its days qualifying for the ‘small cap’ report are numbered?

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