ELEMENTARY VALUE
  • Home
  • About
  • Forum
  • Books
  • Tools
  • Contact

In The Style Group PLC (ITS.L) - Betting on the Jockey

2/18/2023

15 Comments

 
Picture

In The Style Group PLC    (ITS.L)  has been in a death spiral since its IPO and now hovers just above its all-time low. Yours truly has been accumulating  since it found support.

ITS operates as an e-commerce womenswear fashion brand  in the UK, Europe and internationally.  It sells its products through its e-commerce websites, app, and  via digital  retail wholesale partners.

Numbers then chart.

Market Cap = £3.356 Mil
Share price  = 6.4p
Common outstanding =   52.5 Mil
Public float = 40.4% (As of Jan 30th 2023)
TBV =  £5.276 Mil
TTM Rev = £57.3 Mil
TTM Op. Income = (1.5 Mil)​

Picture
ITS.L Price Chart since IPO

What a blood bath,  down  50% YTD,  and  97% since floating. 

This is a prime example of why you should never consider buying an IPO unless  the State is selling. 


Let's zoom in and take a look at the 3 month chart.

Picture
ITS.L 3 Month Chart

The stock hit an all-time low of 5.9p in  late January, bounced to  a high of 8.3p in early February and then retested the low a few days ago at 6p.  Notice the extremely heavy volume  here,  between 10 and 20 Mil shares changing hands each day over the last few weeks. 

Lombard Odier Investment Managers have been dumping their position along with Causeway Capital who were involved in the IPO.

The primary reason for this selling is  the fact that the company announced a strategic review in  December. Maybe they are worried that the company will get sold off on the cheap given the present negative market sentiment toward it. 

Despite this heavy selling the  stock appears to have bottomed out with buying pressure now building a floor.

On to the latest financials.

​As always balance sheet first.

Picture
Picture

Intangible assets here  are comprised of software, stuff like the website and app. Whilst these are an important part of an e-commerce business I don't much care to include them in valuations since  I lean much more heavily on tangible assets. If we are talking about a strong brand name, patents, unique datasets etc then maybe I'd consider them.  In this instance I'm more interested in the  tangible assets.

​TBV =  £5.276 Mil net of £2.405 Mil of intangibles 

​I'm not much interested in the PPE here either, it's mostly some fixtures and fittings and computer hardware.  If it were buildings and land I'd be looking more closely. 

Let's scrub that off too.

Adj TBV =  £4.477 Mil vs a market cap of  £3.356 Mil

Given the company is currently loss making one can reasonably make a case this discount is justified. 

£1.011 Mil of liabilities are contract liabilities/deferred revenues  but the lion's share are comprised of  payables.

Let see what has been happening on the income side over the last few years.

Picture
ITS.L Revenue, Op. Income & Net Income FY2018-2022

The thing that jumps out here is that revenues have been growing like a weed. 

ITS was only founded back in 2013  and since their IPO in 2018 they've grown revenues from  £14.7 Mil to £57.3 Mil in 2022. 

They've only managed to turn a profit in 2021 with op. income coming in at £519k and adj. net income (net of  income tax credit) of £125k. 

At this point you are probably asking  yourself, why am you telling me about a loss-making company whose stock has collapsed 97% since IPO  with institutional players  dumping their holdings  ​ since the strategic  review was announced?

Let's take a closer look at what they say in the review.

Picture
Picture
ITS Strategic Review

The three key points for me are as follows;

Firstly , the board   believes the current market cap  does not accurately reflect the value of the business.

Secondly,  a possible sale of the company could be on the cards, though management notes that at present there are no parties expressing an interest.

Thirdly, the founder is returning to the role of CEO  in an effort to address the current situation.

This third point is the most interesting to me.

The founder, Adam Frisby, started the business with £1k in seed capital back in 2013 and  has delivered 8 years of consecutive  growth, growing revenues from £0 to £57 Mil. 

Not only this but he has significant skin in the game, owning around 23% of the common outstanding.

Picture
Picture
ITS Shareholder Register as of 30 Jan 2023 (Note: Lombadier Odier have since reduced their holdings to 2.54%)

I'm willing to bet the founder is going to be pretty darn motivated to right the ship here.

Not only that, if a sale is on the cards I'm inclined to think he is going to want to fetch a much higher price than the current market cap.

​The latest filing, FY 2023   interim results,    reveals both the good and bad.

Bad news first;


1st half Revenues  are down 11% due to negative consumer sentiment. Fears of a looming recession and rising household costs are clearly impacting discretionary    spending. 

The firm is still loss-making,  printing an operating loss of £3.1 Mil in H1 2023.

On an more positive note we have the following;

Picture
ITS H1 FY2023 Strategic Highlights

The key bullish points for me are the relocation of operations to a larger warehouse, implementation of cost control measures including a reduction in headcount, and a focus on  reducing discount sales in favour of  higher price point items.

What do I think ITS is worth?

It's currently loss-making so valuing it based on discretionary    earnings is out the window.

I'm assuming a sale is on the cards and a potential buyer would be likely valuing the business based up revenues and inventory.

We know revenues are down by 11% in H1 FY2023.  Assuming  full year revenue is down by the same percentage we are likely to see annual revenue of around £50 Mil.

What % of revenue might a buyer be willing to pay here?

10%, 15%, 25%?

That would be roughly  £5-12.5 Mil.

How about the inventory?

In the latest report management claim  that replacement cost of inventory would not be materially different to stated book value.  

Assuming the buyer pays stated book  value for the inventory that's £7 Mil.

Being a fan of Graham and Schloss inventory is my least favourite of current assets so I'm inclined to mark it down by 50% to £3.5 Mil for a more conservative valuation.

With all this considered my range of value is as follows;

​Optimistic value is 0.25 x projected annual revenue of £50 Mil + inventory at stated BV of £7 Mil =   £19.5 Mil

Conservative value is 0.15x projected annual revenue of £50 Mil + 0.5x inventory at stated BV of £7 Mil =  £11 Mil

Pessimistic value is 0.1x projected annual revenue of £50 Mil + 0.25x inventory at stated BV of £7 Mil  =   £6.75 Mil


This is obviously a pretty wide range of value with a blue sky upside potential of  6.6x,  a more conservative   assumption  of 3.3x and a pessimistic  assumption of 2x.

​I'll admit 6.6x is highly unlikely here but a double or triple is not out of the question if the thesis plays out.

What are the risks here?


​First and foremost is the risk  that the founder doesn't manage to right the ship.  What he has achieved with the business thus far is pretty impressive but as the old saying goes; 

'Past performance  is no guarantee  of future  success'.


One could also cite multiple headwinds for the company. 

The switch in market sentiment from growth to value, the inflationary environment squeezing margins and further depressing sales, rising interest rates impacting borrowing costs. The list goes on...

Maybe the situation continues  to deteriorate and the company ends up getting sold at fire sale prices. 

Maybe no buyer emerges and sales keep dropping,  if losses persist and  cash runs out  it could be lights out. 

Thus far there's no sign of insider buying, I'm watching to see if this changes going forward as this would be a key bullish indicator that the situation is improving or that insiders truly think that the stock is significantly undervalued as they assert in their filings.

Talk is cheap, I want to see them put their money where their mouth is.  

Time to wrap things up.


​ITS is currently hated by the market, down 97% from its IPO price.

Institutional    players have been running for the exit since news of a strategic review broke and  sales have started to contract after a period of impressive growth.

On the flipside we have the founder returning to the helm with significant skin in the game  and  his personal pride at stake. If anyone is going to fix the situation it is going to be him.

An asset based margin of safety is minimal here and yet the massive growth over the last several years can't just be disregarded.


Things look pretty bad right now but that is exactly when I like to buy.   Sentiment toward the company is almost universally bearish and yet m
ost of the bad news looks priced in to me. 

The stock looks to have found a floor as buying pressure soaks up  the downward   force  of the sellers.   I expect  the stock to just move sideways on choppy action as the market waits for news with bated breath. 


As always the thesis is simple, in this case I'm betting on the jockey.

Thanks for reading,

David



​Disclosure: Long ITS.L

15 Comments
Charles Gripp
2/24/2023 09:23:51 am

Is there an advantage to using candles over a line chart for your style of TA?

Reply
David
2/24/2023 08:52:46 pm

Hi Charles,

The weekly and monthly candles can be useful in indicating a potential change in trend. They also are useful for gauging buying and selling pressure.

Reply
Mark B
2/25/2023 03:03:22 am

David, thanks for the write-up. Looks like February has seen some insider buying too!

Reply
Mike
2/26/2023 10:49:14 pm

I hope this doesn't end up like windeln de AG. A very small, German company that sells baby items online. The sales are high but the company has not managed to control its losses until today. The stock trades for 5 cents or so.The retail business is tough. There may also be oversaturation. Possibly windeln de is worth nothing as it may never make a profit.

Reply
Mike
2/27/2023 08:56:57 am

One more addition: Windeln de is in bankruptcy proceedings and no buyer has been found.

Reply
David
2/28/2023 07:47:55 pm

Hi Mike,

For sure, bankruptcy is a risk if revenues continue to contract and the losses mount. I've sized this accordingly.

Regards,

David

Mike
3/2/2023 08:51:47 pm

I think the growing sales at a sharply declining stock price is indeed extraordinary. I am curious to see how this will develop. The stock could go to zero or rise sharply.

Hao Ding
2/27/2023 09:19:18 pm

Thanks for the write-up. Very interesting and it's on my watchlist as well.

I find this valuation generally optimistic and not sure why P/S is used in this case. I would only use P/S is going conern is guranteed.

Liquidity value might be the real pessimistic case here and I don't think current price offers margin of safety yet based on liquidity value.

Thanks,
Hao

Reply
David
2/28/2023 07:44:02 pm

Hi Hao,

I opted for P/S and inventory as the firm is currently loss making, however I don't think the company is likely to liquidate anytime soon given the level of revenue growth it has produced over the last few year and thus I didn't go with a liquidation valuation.

I lean more toward the pessimistic/conservative valuation I has ascribed and the optimistic one is obviously highly unlikely.

Thanks for taking an interest in my blog.

Regards,

David

Reply
Hao Ding
3/4/2023 02:41:32 pm

Thanks David, I have spent more time on ITS. I think we are aligned that on asset basis there is no margin of safety but as long as the company survivies, upside is enormous (est. ~5-10x and evne more if it goes back to growth mode).

Then the question becomes the possibility of a turnaround, which is difficult to answer given evidence on both sides.

May I ask:
1. What gives the confidence to bet on the jockey? To me the founder knows fashion and marketing, but maybe not on financials / restructuring. Likely he is relying on the CFO, who is also very young and has only 10 years of experience.
2. What % of portfolio are you betting on ITS? I generally feel the thesis is opportunistic and I will probably only bet small.

Mike
3/7/2023 07:34:01 pm

The stock crashed today. I guess because of the following news "Proposed cancellation of admission to trading on AIM"

Reply
David
3/7/2023 08:29:45 pm

Yep, the board is recommending a sale of the business for £1.2 Mil and the deal is structured so that the founder retains his state in the new enterprise whilst minority holders get thrown under the bus.

Thankfully I sized this one super small given how high risk it was.

Reply
Charles Gripp
3/8/2023 12:24:52 am

Wouldn't ITS be a good candidate for further research now that is it is going to be sold for more than it's current MC? I just put $50 for tuition.

Mike
3/12/2023 02:05:41 pm

to Charles Gripp: Actually, the stock has become much cheaper. However, if the stock is no longer tradable and minorities are not bought out, this is of little use. I can then no longer sell the shares or perhaps privately. This is also the disadvantage of such small shares that have also lost a lot of value. The risk of delisting is significantly increased.

Mike
3/18/2023 10:07:35 am

While I find small-cap stocks very attractive, I'm not so sure about buying small stocks that have fallen sharply in price.That the stock can return to its original value is hopeful thinking. The price has fallen because the companies are not financially weak or the market has collapsed. Often these are also companies that have no future at all. Where is the evidence that this works? I think you should mostly ignore the price chart and buy based on fundamentals and the business model only.

Reply



Leave a Reply.

    David J. Flood

    UK based Investor. I focus
    ​on Net-nets, Pico/Nano caps, AIM/OTC/Dark stocks & Special Situations. Balance sheets & Long-range price charts are my guide. Looking for inflection points. Do not construe my blog as investment advice, always conduct your own due diligence.  Caveat Emptor!


    For updates enter your email address and hit subscribe


    RSS Feed



    Archives

    February 2023
    May 2022
    January 2022
    November 2021
    June 2021
    May 2021
    April 2021
    March 2021
    February 2021
    December 2020
    September 2020
    June 2020
    March 2020
    February 2020
    January 2020
    December 2019
    November 2019
    October 2019
    September 2019
    August 2019
    June 2019
    April 2019
    March 2019
    February 2019
    January 2019
    November 2018
    October 2018
    August 2018
    April 2018


    Categories

    All
    AFFY
    AWRY
    BVERS
    CDTI
    CWPS
    Dark Companies
    ECRO
    EESE
    ENET:AIM
    EQTL
    FULO
    GTC:AIM
    HDT:AIM
    HGPI
    HMGN
    IMUC
    IOF.L/IOFNF
    ITS.AIM
    LTRE
    MFCO
    MGAG
    MIRI:AIM
    MNO:AIM
    MYRX
    MYX:AIM
    NFPC
    NTIP
    NVTRQ
    ORGN
    PCOA
    PHSC.AIM
    PLWN
    Podcasts
    PPMT
    PSSR
    SPCB
    Svenda's Manual Of OTC Stocks
    SYEV
    TCN:AIM
    TTYP
    WSTL
    ZCOM


    BLOGS I FOLLOW

    No Name Stocks

    Svenda's Manual of OTC Stocks
    ​
    Caveat Emptor Stocks
    Leaven Partners
    OTC Adventures
    Nothing But Net Nets
    Clark Street Value
    Value Investing Blog
    Alpha Vulture
    Deep Value Investments
    OddballStocks
    Value Stock Geek
    Barel Karsan - Value Investing
    Shadow Stock
    Hidden Value
    Yet Another Value Blog
    Streets Of Value
    TES Optimal Value Investing
    The Bad Investor
    ​
    Undervalued Japan
    ​Liquidation Almanac
    ​
    Adventures in Capitalism
    White Chip Stocks
    Light Blue Value
    ​Global Investing Insight
    ​Mesaba Range Value
    The  Market Plunger
    Neto's Notes
    ​Battleship Investing Blog
    The Investment Long-List
    Oceania  Value
    Grahamian Value Digest
    Stock Speaking
    Canadian Value Stocks
    Analyzing Bargain Stocks
    MicroValue
    ​
    Hidden Gem Investing
                                                             © COPYRIGHT 2018-2021 ALL RIGHTS RESERVED
  • Home
  • About
  • Forum
  • Books
  • Tools
  • Contact