Stockopedia StockSlam - November 2018

Last week I had the great pleasure of hosting the latest Stockopedia StockSlam at Mello London. To my mind this made for a perfect pairing; a day of intense, captivating presentations followed by a more lighthearted hour of fun courtesy of other private investors. In addition I'm very aware that the previous StockSlams have all taken place in Central London and this understandably excludes many people who'd like to attend; fortunately Mello draws investors from across the country (and further afield) and I know that for many people this was their first experience of a StockSlam.

Fortunately we had a great line-up of presenters for the evening with some really excellent ideas for investment. As Stockopedia made sure to record the event, and then have everything transcribed, what follows is pretty much a verbatim record of the event.

Hopefully this provides a flavour, for everyone who couldn't make it, of what it's like to take part in a StockSlam. Unfortunately you don't get any pizza with this write-up but you will if you manage to make it to a StockSlam in 2019!



Focusrite (TUNE)

Ok so, what do we have here, Focusrite. As you can see mid-cap company, £285m market cap reasonable stock rank 75, looks pretty decent to me. Now what does this company do? It's an audio products company. They do hardware, they do software. They allow people from amateurs to professionals to record their music, they also provide keyboards for electronic artists, they are very well known in this industry. They have been doing it for around 30 years.

They started targeting professionals, so they know what they're doing. They have found loads of amateurs to broaden their customer base and they now sell in something like 160 countries. So they're a global company selling high-end to mid-end audio products. They are still run by their founder Phil Dudderidge; he is the chairman of the company and he still owns 38% of the shares.

Now the company hasn't been listed that long, it listed in 2014. This was mainly so that Phil and other members of the team could realise some of their investments. Phil at that point had 53% of the shares. Now there's a pretty consistent track record of growth and profitability in this company; net profits have been steadily growing and the top line has been steadily growing. A reasonable bit of variability in profits there and I think that's a good thing as it says to me they are not massaging the numbers which has been a topic of conversation today.

Now in the recent full-year results 41% of their sales were in the US, 40% in Europe and 19% in the rest of the world. EPS was up 22% in the last results and cash was up 60%. However, it does look a bit expensive. The forecast is for an anaemic 2% growth in the next few years, and given that the PE is around 24, is it too expensive? Well it's fair to say that they like to over deliver. In addition we're talking high quality earnings. They have a ROCE of over 25%, 15% margin, no debt. Good cash conversion. In my mind, this is a company that delivers.

Now given all that, what's the summary? High value company, valuable niche, conservatively run, one for the long term. So that means they do quite a lot of R&D and capex but despite that they are still cash generative. Global sales means they have many customers, they are not dependant on sales from the UK so Brexit shouldn't hit them too hard, but they're obviously preparing for it. What I would say is that this is a company that is probably worth buying on price pullbacks for instance in October they fell 28% from the ATH, probably true for a lot of shares, but since then they have recovered 22%. So clearly people are willing to buy the company and give them the benefit of the doubt.

Q1) What's the spread for this particular stock:

I don't think its huge. Lets see, so yeah you can see there the spread is 200/225 bps?

Q2) Operating profits are improving but returns on capital and equity have been declining over the last 5 years, any reason for that?

Well they do obviously have ongoing capex and R&D and I do think there is a lag between that capex and research and additional sales.

Capital Drilling (CAPD)

I have picked Capital Drilling which is a Super Stock as you would expect. It's easy to understand, it rents out or hires out rigs across Africa for drilling or mineral rigs. It’s one of the lowest EV to EBITDA shares on the market; you can see 2.4 there. There are a couple of reasons investors might not like this. The first one is political risk, so people view Africa as high risk, but it's got multiple rigs, so they're mobile and not fixed to one location. It has diversification, being in seven countries, and has been operating since 2005 and listed since 2010 so its not some fly by night operator.

It has quality major mid-tier clients, so these are high cash generative miners not your cash draining operation companies. While it's got variable earnings you can see that its operating cash flow has always been positive. Often its free cash flow is positive, in fact its opex is highly variable so when the markets for rigs is poor its reduces opex but when the markets for its rigs are high then it can invest into new rigs and that's what you see in its cash flow profile.

It has exposure to Tanzania, which some people don't like, but actually it's now growing in that area, so that risk is starting to be mitigated. The upside potential, so its rapidly deploying its rigs to where they're getting the best usage so its currently utilised 46% and they are targeting 60%. If they reach that I think the EV/EBITDA can go below 2 and that makes it pretty much one of the cheapest stocks on the UK market.

It's increasing its dividends so you see it pays out a decent dividend, it was increased 20% last time. Yet it is at a discount to its competitors except that it has better quality rigs, newer rigs, more maintained rigs and is generally even more diversified or has better quality characteristics than its peers. It could go up by 2 to 3 times in share price and it still wouldn't look expensive.

Q1) Given that we've had a strong oil price for the last 5 years, why has it struggled to make money for the last 3 or 4 years?

Sorry its mineral drilling rigs not oil so you can see the bear market essentially in mineral in terms of its earnings. But as I said before it cuts its cloth to the markets and therefore is always operating cash flow positive.

Q2) The long term history it seems a bit chequered with revenue down from 160 million 2012 to 80 million 2015. Is it going to go up again - are you pretty confident about it?

So I think in terms of revenue, its very easy to work out revenue. You take the average number of rigs, multiplied by the utilisation, multiplied by the rate of the rigs. The rate of the rigs is at an all time high while the utilisation has been weak. It's the redeployment of rigs to where they are used which will drive the utilisation up and therefore the revenue up.

AFH Financial (AFHP)

My stock is AFH Financial. They describe themselves as Financial Planning so basically as well as essential staff they have got a lot of self employed financial advisers. The company was founded by the current CEO Adam Hudson in 1990 and he still has a 15% share holding while Slater holds 9%. It joined NEX in 2012 and then moved to AIM in 2014. They placed at 40 pence with the idea to keep raising funds in order to make further acquisitions. So they've had a number of regular placings after the IPO since then.

The IFA market is highly fragmented and there are thousands of small firms. What they do is they consolidate the market. So usually, say the boss wants to retire, in this instance, something happens and they want to retire. They provide the usual advice to clients like investments, pensions, tax efficiency, inheritance tax, mortgages, life insurance that sort of thing. They've also got corporate solutions division, but that's for another time.

They make their money, their revenues from the service fees for advice, they also have assets under management, they've got a few funds so they get the recurrent fee from that. They have been increasing the funds under management as well over the years. The main driver for this acquisition strategy is in 2013 there was something called RDR where regulations came that you had to have transparent fees for your products instead of being paid by commission. Also with higher qualifications some IFAs had to increase their capital rates and this made life difficult for small firms. So they started to sell up and AFH have been buying at very low multiple single digits since then.

The average P/E is about 20, so all the acquisitions are highly accretive, and the PEG is 0.4. So even though the P/E is 20 the EPS change this year is predicted at 46%. The one big risk is the HMRC rules for Self Employed status for the IFAs. If that changes that obviously will be a big risk.

Q1) I noticed that the free cash flow from 2012 has been negative every year? Do you have an explanation for that?

It's been negative did you say? Yeah because they keep ploughing money into over a dozen acquisitions this year so this is part of their strategy. In fact they are coming back to the market for funds.

They have got two waves of acquisitions which they call Buy And Go and Buy And Keep. The Buy and Go is just the assets where they will just buy the client list for example. Buy and Keep is where they also buy the assets and bring in the IFAs as part of their group.

Mycelx Technologies (MYX)

I am going for something a little bit off my usual type of choice because they are sort of a loss maker but I'll come to that. Mycelx Technologies have basically patented a product that removes oil from water to one part to a million. A virtually fail safe process and there doesn't seem to be anything else on the market.

It came to my attention the first time because it met my technical screen, which is kind of based on Minervini. Which is basically the 50 day moving average above the 130 which is above the 200 and then the 52 week high is 50% above the 52 week low. That's my tech screen and the current price is within 25% of the high.

So what else do I like? I like fundamentally it's got cash, it's not a lot, but it has cash so there is no debt there. It has held up well in the recent sell off even making new highs. The return on capital and operating margin they're not great but they are above the previous readings.

Revenue is rising, its going to slow in 2019 as per the estimate. I like that PBT and EPS are also rising, and the thing that's unusual to me is that it has not yet made a profit, but it's been confirmed in a recent RNS that in 2019 the estimate is going to come in, so we should see a minimum I think 2.4 million dollars, I think it's got 2.45 on the Stockopedia screen so I’m not going to focus on that. That's actually based on no new contracts coming in before the year end.

If I look at the projection from 18/19 I can the see the 50% growth there and the PE is somewhere less than half of that, maybe a PEG of 0.5 or thereabouts.

So it seems to have a good basic product, meets my tech screen, has cash, held up well in the recent sell off making the all time highs, ROC, operating margins decent, revenues rising nicely, profits which is the negative side here but it looks like it's going to be profitable this coming year, and then the forecasts look pretty good on the 50% increase on a P/E of about 25 or so.

Q1) Looking at the revenue figures, it shows that the sales almost halved in 2016/17, I think I've got that right, some explanation for that?

No none at all sorry mate! Never noticed that. The actual for last year was about 17% and then we've got 100% for next year which is going to slow down to about 10%, I missed that.

Mission Marketing (TMMG)

Hello. I look for five things in an investment. Profit set at 20% one year and 50% 2 to 3 years, limited downside, simple story and a chart pattern that confirms potential upside.

I'd like to talk about Mission Marketing which at 58p gives a value of 48 million. The PE ratio of round about 6 times, the EBIT/EV ratio of 5 times, and yield of just under 4%. Stock rank is overall 96 which comes out as a Super Stock.

So the lowest figures seem cheap and worthy of further analysis, I followed the company for 8 years I've met management several times and I'm a current holder. What do they do? They are basically a marketing agency, they started outside of London, and lived off that reputation. But now they are growing into and developing a small global network. They have always had this idea of having entrepreneurial CEO's head the agencies, and then a small focused head office team supporting it. However in simple terms, as a marketing agency (even if they describe themselves as digital marketing) but as a UK marketing company I don't see this a growth industry. It's cyclical and it gets a lot of issues which are that it's people and talent based and that runs the risk of people leaving. So that gives you several reasons as to why this company is not achieving.

But I see 5 positives. If you look at their track record, over the last 8 years the EPS has gone from 2p to 9p, the dividends have gone from zero to 2.2p and debt has reduced from being 16 million in debt to net cash position forecast for next year. They have without doubt very successfully generated cash over the longer term and then reinvested that to grow their business steadily.

Clients; they have quite sticky clients, so 35% of their revenue comes from their clients that have been with them for 10 years or more, and I think that is to their credit. The management team. So David Morgan rejoined the company in 2010, and then Peter Fitzwilliam joined as the FD. The management have skin in the game at 20%. Two years ago they had a an LTIP scheme which converted at 75p. Perhaps that was generous you might say, however what is does mean is that the current team will stick around until those targets are met.

Exceptionals. This is the interesting bit because these are actually kind of positive. Two years ago they created a fuse hub, and in that they had some development companies, one of which they just sold for over 5 million and there is prospects to sell the other 3 for around 10 million over the next couple of years.

Then the chart. They have 9 years resistance at 50p which has now been broken, which is very very significant, I think that leads to potential upside. And during the recent turmoil many reasons to sell a UK based marketing agency, but they have not been sold off. I think that this is of long term fundamental value.

So this company meets my 5 criteria, and if you have any questions I would be happy to try and answer them.

Q1) Hi just a single question, the forecast says that in 2018 revenue will drop very substantially, what's happening there?

So I believe that they have some long term view revenue which they pass onto the clients. Its not like for like measurement really.

Q2) Why is the market giving it such a low rating?

I think that the market sees them as being a marketing agency, which is always risky because clients can leave and management can leave. I think that what's going to change in terms of the re-rating because people will have more and more confidence in the management, and the evident plans to stick around for for a long time.

Sosandar (SOS)

The only thing that makes sense for me to talk about is my largest personal position, so it won't come as a surprise to people that read my blog that its Sosandar, not the sort of thing I would normally invest in. This is a start up, ladies wear ecommerce company. Its currently valued at about almost 50 million, slightly above. It's won the coveted award of Bonkers Evaluation of the week, from Investor Champion, not once but twice. So don't be under any illusions this stock is not cheap under any value metrics, which is why we have a whole row of not applicable in the value section of the report.

So why did I, actually the StockRank I just noticed has been creeping up, so I think it was about 5 last time I looked, and it's crept up to 31, so pretty good. What you've got to bear in mind is that this was reversed into an Adam Reynolds cash shell, and people have different views on Adam Reynolds cash shells, but my view this is the only decent one, and this is my sector - I worked in the fashion world for 8 years, so I understand this sector pretty well and have made a lot of money with BooHoo and This is the next big one. However it's highly rated, very very expensive 50 million market cap.

The historical numbers are terrible because it's a start up, you cannot design and market a bespoke range of over 500 ladies wear styles, which this company is doing, without some central overhead. So I think investors are very short sighted if they look at this and just say "oh the inflation's too high, isn't it terrible". What I think you have got to do is look at some key metrics. So the two lady chief executives, their experience is unique, set up and ran "Look" magazine. So they are not rag traders, they are actually coming at it from a completely different angle.

Outsourced business model, no legacy issues, Clipper Logistics move the physical product, the IT is all going by Magento and it's expensive, we know that. Aspirational brand and the marketing is nearly always by direct mail.

Bloomsbury Publishing (BMY)

Right well my stock is Bloomsbury Publishing, the company that brought you Harry Potter when all the other major publishers turned it down. So 155 million market cap company, it's in the small cap index and is a balanced, Super Stock. You'll see its StockRank is 97, and most importantly for me it has a quality of 86.

The balance sheet had net cash of 16.9 million in the interim stages at the end of August. Generates oodles of free cash, you can see there how earnings run through all the way through to 21.1p free cash, and the valuation I just think is very very, attractive. Price to cash flow just 11 times. Prospective yield nearly 3.9% and 14.4 times earnings.

So you could just think this is sort of a worthy, maybe slightly boring quality stock, which in times like these, I think it's probably quite a good idea, but I think there is more to it. Following May's results, the earnings were upgraded by 9% from the current year to date in February, and the board said we have a number of key initiatives that the board expects will lead to our performance of 2019/20 onwards being well ahead of our previous expectations.

This is all brought together in their Bloomsbury 2020 strategy, and the main element of this is basically growing the non-consumer sales up to about 50% of the overall business from the current 37%. Included in that is its digital initiative, where it's basically moving much of its academic and professional division online, so users can search, research, access and print, and they are also doing partnerships with Net-a-porter, Institute of Chartered Accountants and Spotify have all been announced recently. The aim here is to benefit from much higher margins, so they have a target of 5 million profit, from 15 million in revenue in three years time, so its a much higher margin business. Other positives, Harry Potter keeps on giving, they are publishing anniversary and illustrated editions. They have got other good authors such as Sarah J Mass, and then Christmas season is still important to them, so next news will probably be mid-March as a year end trading update.

So why buy now? I think we've got improving results coming up, it's a high quality company, and the share price is 17% off its June high, and at a very attractive valuation.

Q1) How much is still dependant on Harry Potter?

I mean this year you will see they haven't actually got any of their anniversary or illustrated editions coming through. We had one last year and that was a nice benefit for them, but I think Harry Potter on the consumer side is about 63 million, about a third of that, so I'd say about 20% at a guess.

Sopheon (SPE)

So any company who's share price has risen in the last 3 months is worthy of our attention. Sopheon has done just that, in the last 3 months it's up 12.6%. In the torrid four weeks we have all just enjoyed, it’s up an incredible 7.6% - so who are Sopheon?

Sopheon are basically new product development for large organisations. They supply P&G, Honeywell, PepsiCo and its very much a marketplace at the moment which is demand pull rather than them pushing. So they've just got to capitalise on it, which the last 3 years of business has shown them grow and grow and grow exceeding expectations. They work in broad sectors - FMCG, Chemicals, Aerospace, Defence - and they'd quite like to be doing more in insurance. They operate in North America and Europe, and they have been publicly listed since 1996, so they are no new kid on the block, and their moat is that they are in a very specialist sector, but it's so small that someone like SAP wouldn't want to go into that sector.

So what info do they need to know?

They need to know that the market cap is 111m, there's a FinCap target price of £12.95, the free float is 51.5%, the operating margin gets a nice green traffic light at 20.5%. The return on capital is 30.4%, another green light from Stockpedia, and the return on equity 36.9% and a further green light from Stockopedia. The dividend's a bit of a token gesture at 0.42% but it shows good intent. This is on the AIM market with a nice cash balance of £12.8m. The Chairman Barry Mence currently has a 22% holding.

And what about the Stockopedia numbers?

Quality is a fabulous 99, value 16, momentum 98 to give a fantastic StockRank of 86. Overall classified as a speculative, small cap and a high flyer, which is my favourite classification.

So how are they doing?

They're doing fantastically well. They have had two earning per share updates since May, which means they are 23% above where they were meant to be from their forecasts. They've got revenue visibility of 30 million and they've forecast 31.5 million. They have got 40% recurring revenue at H1 and they've got 29 new licence orders from 9 new clients which is 50% up on last year. That's new customer wins, and they've got 2 material contracts, one in chemical and one in electronics with one new customer and one existing customer. A note of caution is that they always seem to under forecast and over deliver, and then looking forward the earliest share forecast profit figures they don't look so great. That's what I thought last year when I sold out, and I had to briskly buy back in.

So what words can you leave us with?

We give the last words to Paul Scott, who back in October said "Well done to holders, we have a good update out today, and comments from the house broker that a further beat with an upwardly revised forecast could be on the cards. That seems to be a strong reason to hang on to this share. If I held. Which I don't."

7Digital (7DIG)

So the stock I was going to pitch was Coral products but I'm going to pitch a different stock. Some of you will know what it is, I'm 50% down so do not buy this stock on that recommendation because it's not going so well. What is does, it builds music platforms and has extensive music rights, what that actually means in English is they have a platform of music rights, so for example Vodafone, you take a contract with Vodafone they give you 6 months free of Spotify. Now what happens in two years is you get rid of Vodafone for a cheaper phone contract and you keep your Spotify. So really Vodafone have created customers for Spotify. And it's the same in Auto OEMs as well, dashboards, I'm not actually sure which auto companies but we're given the dashboards to Apple music, when you sell the car, you keep your Apple music, get a new car, and the auto companies are creating customers for music companies. So if you haven't guessed it, the company is 7Digital.

Lets load it up. It's a sucker stock, because I'm a sucker, StockRank of 11 I think. But the reason I bought into this company is because it has a huge moat, they have got 65,000 music label agreements built over 30 years and have the worlds biggest extensive music catalogue. There are 90% margins on the licencing, and they are building products for McDonalds, private programmes, hopefully Auto and Amazon both use 7Digital services. Two of the worlds three biggest retailers. Walmart aren't doing it yet, but I think they will be doing in in the future. Will it be with 7Digital, I don't know, but I do know there is no other company with as much music rights, and the history that they have, and when they do turn profitable, I'll be piling in. Hopefully it's going to make me a lot of money, it's just not doing it yet.

Fulham Shore (FUL)

Right so I am doing Fulham Shore which is a casual diner which is not the most popular sector right now but that can often cut out its own opportunities. It was incorporated in 2012, listed on AIM in 2014. I think with these small cap roll outs management can be very important and Fulham Shore have some of the best in their sector. They have David Page and Nabil Mankarious - that's the Chairman and Chief Exec. They were buying Pizza Express in the nineties when they took it from about £0.40 to £4.00. It was actually at £9 at one point.

Anyway back to Fulham Shore, they do Franco Manca and The Real Greek, they used to do Bukowski but they closed that one down. The economics of Franco Manca - there are 42 sites and about £650,000 pre-site set up, they say they get 30% return on capital pretty much immediately. Then that carries on for the rest of the lease life.

With The Real Greek there are 16 sites there, they cost a little more to set up at the same 30% return on capital, which gives them 58 sites in total. An important part of their business model is they source produce directly from growers in Greece, Italy and Spain. This allows them to cut out several layers of wholesalers. They can then pass these price cuts onto customers, this is a direct result of their industry knowledge and their experience in the sector. So for example Franco Manca on average are 40% cheaper than Pizza Express, and because they rolled Pizza Express out you can tell whether they will be opening a site.

So in terms of valuation, you can't see it there but it was too expensive basically. Around 2015 I think it was 20 units with a 100 million pounds market cap, which would give it around 5 million per restaurant.

Today it is has 3 times the units and half the market cap, so its back down to about 1.5 million enterprise value per restaurant. Then when you compare that to the Restaurant Group bid pricing Wagamamas at 4 million pounds per restaurant, so I think it's an interesting time to consider it. In terms of the opportunity I think since they have had this blip its been down to capitalisation in London which is an issue they have moved past from. They have had two positive trading updates since the blip but the share price hasn't reacted. The wider concerns in the sector, they warn about this happening, and it did come to pass.

The roll out is on track, sales are up, that's on no new openings (net) but the share price hasn't reacted, that's it.

Q1) So the forecast for next year shows a huge jump in EPS and quite a big jump in revenue as well, how will they generate such a big increase in both and is the jump in the EPS fragile?

My take on that would be yes, possibly, considering that's basically down to the roll out, so that could really change the bottom line figure. But I mean the honest truth on that is that I think you just need to look at the business they are building at this moment in time, the situation probably did change over the last year and its basically coming back on track. So I don't know how much credence I would attach to those numbers or not, all I know is the on the ground operation is doing well.

Filtronic (FTC)

Right folks, my stock tonight is called Filtronic which is a manufacturer of aerial gizmos for the telecoms and defence sectors. It's very simple but it's speculative investment case, but while we have the stock reports up a couple of things to note are, one this is classed as a momentum trap at the moment, one of the negative styles, one of three you have seen tonight. But the other thing I'd point out are that firstly the operating profit figures are actually wrong, the operating profit was level this year but that doesn't really affect the investment case. The investment case is very forward looking.

Key things though are it has net cash, it generates net cash, and it has a market cap of less than 40 million, and with most of its manufacturing outsourced now it's actually got the ability to scale up or scale down.

So the big thing we saw in April they announced they collaborated with Nokia and developed a massive MIMO aerial - MIMO is multiple in, multiple out. It's basically an interlaced antenna that supports 5G networks which is big news around the industry. So the market research suggests that the MIMO market is going to grow by about 40% per annum over the next 8 plus years, and will be worth more than 21 billion dollars in 2016. Now just doing some hypothetical sums even a 1% market share, that gives you a market cap of way above 40 million. But what could that market share actually be? As we know they are partnered with Nokia and doing business with Nokia - they have announced two orders in August, but they won't tell us anymore until they are outside of their normal buying cycle.

Now within the mobile infrastructure there are actually four main players, all roughly equally sized. We have Nokia, we have Ericsson, we have Huawei and we have ZTE roughly equal size, but Huawei and ZTE are being frozen out of a lot of the western markets so potentially Nokia and Ericsson's share could be substantially higher. Filtronic are one of two suppliers to Nokia, so potentially you can create a case if you want to be tremendously adventurous to suggest that Filtronic could have about 20% share. But I don't think we need to go there just to make this an investment case, even the 1% gives you a multiple and we know there will be something as they are already engaged in a contract in the States with T-Mobile.

So we are awaiting news of the new contract wins but in the meantime there is big potential here, not without risk of course.

Q1) What's to stop Nokia or whoever just developing their own aerial to cut these guys out completely?

To a degree patents but also the antenna was actually a collaborative deal with Nokia so there is obviously some partnership deal there. I don't know the details of the contractual arrangement. But Nokia are a long standing customer of Filtronic electronics.

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