Stock Buy Rationale – Live Company Group LVCG

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THIS IS NOT A TIP OR RECOMMENDATION. I AM NOT A TIPSTER. PLEASE DO YOUR OWN RESEARCH. PLEASE READ THE DISCLAIMER ON THE HOME PAGE OF MY WEBSITE. IF YOU COPY MY TRADES, YOU WILL PROBABLY LOSE MONEY. I HAVE A LARGE PORTFOLIO AND I USE DIVERSIFICATION TO SPREAD RISK ALONG WITH TRICKS LIKE HEDGING AND OCCASIONALLY BY THE USE OF STOPLOSSES - IF YOU BUY ANY STOCK YOU REALLY SHOULD FOCUS ON HOW IT FITS IN WITH THE REST OF YOUR PORTFOLIO AND KEEP RISK MANAGEMENT AT THE FOREFRONT OF EVERYTHING YOU DO. BE AWARE THAT ALL INVESTORS/TRADERS GET THINGS WRONG AND MANY STOCK SELECTIONS WILL WORK OUT BADLY.

Often when I write a ‘Buy Rationale’ Blog about a particular Stock it is as part of the thorough research I need to do before buying a Stock and I find it helps me hugely in forcing me to follow a highly structured and robotic approach. However, in the case of Live Company Group LVCG which I bought recently, I have been reading about and following progress on this Company for a very long time and because it is very much an early-stage business, the amount of research that can sensibly be done is probably a lot less than for a well-established business anyway.

Besides that I am very busy with other stuff at the moment and do not want to spend hours on writing this Blog so I will just focus on the key things that have made me buy into LVCG and what the key Risks are that I think any Investor in LVCG must weigh-up. I will also cover the Valuation case in some detail as I think it is very good value with a lot of potential for upgrades to the forecasts.
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I first became interested in LVCG not long after it emerged on the Market after Parallel Media Group evolved into LVCG. I remember someone on Twitter telling me that they dealt with making huge model Animals and Dinosaurs and stuff out of Lego Bricks and this at least tweaked my interest because I live probably not much more than a mile from Legoland (a lot less as the crow flies) in Windsor and I know how bonkers busy that place is and how it has just grown and grown and grown over the 20 or so years that I have lived around these parts. It is also obvious that Lego is no cheap toy and considerable money must be made from decent margins combined with the ubiquitous strength of the brand and how it has appeal across all ages with even someone as ancient as myself remembering playing with it as a kid.
 
Initially I was a bit skeptical as I see so many Junky Stocks on AIM and they all offer so much amazing ‘promise’ and bucketloads of ‘Jam tomorrow’ but in reality very few even deliver one of those miniscule Jam Jars you get in Hotels with your breakfast. However, the big difference that I am seeing with LVCG is that they are actually selling stuff – well, when I say “stuff” I actually mean they are arranging BRICKLIVE Shows which appear to be highly popular and well attended. This was the trigger to getting me interested when the number of Shows they were doing was just increasing and increasing and at the same time they have created ‘Touring Sets’ of huge Lego Models like representations of Zoo Animals and Dinosaurs and these Touring Sets are getting hired out on a very regular basis.
 
Anyway, it is one thing to be announcing all these Shows and Model Tours, but what matters is whether or not these are bringing in Revenue and in due course the Profits that are essential if a Company is to be a proper Business rather than just yet another piece of nonsensical AIM Garbage (a ‘Lifestyle’ Stock is how some people refer to these – and what they mean is that it ensures the Directors have a very nice Lifestyle at the expense of Retail ‘Investors’ !!). And in the case of LVCG I can confidently say that the Company is bringing in the Revenues and the Losses are falling at a decent rate and Profitability should be on the way very soon – in fact, for 2019 they are expected to make a small Profit as you can see in the ‘Valuation and Targets’ section below.
 
I cannot stress enough how important this distinction between decent AIM Early-stage businesses and AIM Junk Stocks is – where Companies that are actually showing clear evidence of Orders and Sales are hugely more preferable than ones that just survive from Placing to Placing (where Shareholders get continually diluted) and of course many Biotech and Pharma related Stocks just scrape by on Research Grants and suchlike – they book this as Revenue but really it is a joke because the only Sales and Revenue that count are when Customers are actually buying Products and/or Services because there is proper real demand.
 
So my interest was first piqued by the Lego Brand connections (note there is no formal relationship with Lego and LVCG position themselves as a Brick Model company rather than being Lego alone) and then the continual announcements of Shows and Tours yet what was holding me back was wanting to see progress in the Revenues and progress to Profitability but I was also eager to see a Broker Report from Shard Capital that I was regularly being told was on the way. Anyhow, the Shard Capital Report duly arrived and this gave me confidence in the Numbers and made me take the step of buying a very small ‘Starter Position’ (go to the ‘Trades’ page of this website and you should see the entry there).
 
At the time of scribbling this in mid-July 2019, I would like to buy more LVCG but with general concerns I have about the Markets with regards to Brexit and some pretty crazy valuations in US Tech, I am being quite careful and not rushing to deploy Cash. However, that is not a position that is set in stone and if LVCG comes out with News that gets me particularly excited then I might buy more sooner rather than later. We shall see but I most definitely see the small Position I currently have as just a ‘Foot in the Door’ (if I don’t do this, I will forget about LVCG as something else takes my fancy !!).
 
Company Website
To get an understanding of what LVCG does, then have a look at their Website here:
 
http://www.livecompanygroup.com/
 
The ‘Investor Relations’ page is here:
 
http://www.livecompanygroup.com/investor-relations.html
 
And you can find the Shard Capital Broker Report here:
 
http://www.livecompanygroup.com/downloads/LVCG_DCJ%20%28retail%29[1].pdf
 
Justin Waite of SharePickers and VOX Markets has been recording some extremely helpful Podcasts with LVCG and you can find them here alone with some others:
 
http://livecompanygroup.com/podcast.html
 
Main Attractions of LVCG

• Clear evidence of holding more Shows and Tours and growing Revenues.

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• The worldwide enthusiasm for Lego Bricks and the obvious connection to LVCG but it must be appreciated that the Company does not have any kind of Exclusive Relationship with Lego and they position themselves as a Business which uses ‘Bricks’ to make Models and to offer Experience Shows and these don’t have to be purely Lego.

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• Several Revenue Streams which include the Shows, the Touring Assets, associated Merchandise (they have recently signed a Deal with Licencing Management International [LMI] to assist with increasing Merch sales).

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• As I will address in the ‘Valuation and Targets’ section, the Stock looks very good value and this is against Forecasts in the Shard Report which look very low.

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• David Ciclitera, the Chairman, has shown positive engagement with Shareholders and after some eyebrows were raised about the level of payments he received, he has waived his Bonus to calm such concerns and he is also appointing a Non-Exec to head up the Remuneration Committee to improve the perception that Corporate Governance was lacking.

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• LVCG is a pretty small Business with a Market Cap around £27m at the time of writing this and from such a level if it can keep growing Revenues and Profits then there could be a significant amount of upside for Holders.

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• There is considerable ‘First mover advantage’ in what LVCG are doing with their Lego Models and also the acquisition of BrightBricks which is based in Borden in Hampshire and is where the models get built, gives them a huge amount of know-how and Intellectual Property around the techniques they use to both design and create the models but also for how they ensure structural strength and durability. The BRICKLIVE umbrella brand and the sub-brands like BRICKLIVE Safari, BRICKLIVE Ocean etc., have a certain amount of first-mover advantage and look like potentially becoming a very well recognised Brand.

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• The recent deal with Nickelodeon UK whereby LVCG will create models around characters etc. from Nickelodeon Kids TV shows has a lot of potential to bring in extra Revenue and Profit. LVCG will make Themed Tours of characters like ‘Paw Patrol’ and a Royalty will be paid to Nickelodeon but LVCG will benefit from the popularity of these TV Shows.

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• Attractions for Kids are growing in popularity the world over and this appears to be an increasing trend as mobile-fone and camera technology is combining with stuff like Social Media to encourage people to seek ‘Experiences’ and LVCG Exhibitions and Shows play to these themes. The recent acquisition of Merlin Entertainments by the Lego Family shows the growth expected here.

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• Needless to say, since I have bought into LVCG the Newsflow has dried up a bit (to be fair it is the quiet Summer period) but one of the attractions to me was the constant drip, drip, drip of Show and Event announcements. I expect this will continue once the Summer lull is over.

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• The bulk of LVCG Revenue so far has come from Asia but there is huge scope to grow in Europe and North America (note LVCG have recently wound down their efforts in South America to put the focus on North America and this makes sense).

 
Key Risks of LVCG

• LVCG is a fairly new Company and by definition it therefore does not have much Track Record and a lot has to be taken on trust and hope. That is the nature of early-stage Companies – you can mitigate this risk by just buying a smaller position than you would with something that is far more established and easier to value etc.

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• The Stock is highly illiquid. The Directors and Major Investors hold most of the Shares and the free-float must be very small. Just a few Shares being traded in a day can result in wild swings in the Share Price (page 51 of the Shard Capital Report has a list of the Major Shareholders).

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• LVCG did a ‘Placing and Subscription to raise £2.2m’ back on 11th February 2019 with the intention to use the Funds to expand the BRICKLIVE Zoo Models to meet demand for the Tours and also for Working Capital purposes. The Full Year Results came out on 14th June 2019 and LVCG had Cash of £120,000 so it is clear that the Cash situation is quite tight. However, as the Company grows its Revenues we should see the Cash Flow situation improve and this reduces the need for more Funds. I do think further Placings are a risk though and this would dilute existing Shareholders. On Page 52 of the Shard Report there are some forecasts for Profit & Loss Account and Cashflows and the implication of these is that a Placing might be avoided. It is also worth realising that there are really two different types of Placings: those that are to fund specific investments which are likely to boost sales and profits and those where they are simply needed to keep the company going as it just continually burns cash and never generates any meaningful revenues or profit.

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• LVCG has done well to create Branding around the BRICKLIVE name and its sub-brands but there is a risk that Competitors could create similar offerings and make life tough for LVCG. However, the Company most definitely has ‘first mover advantage’ and it is also possible that the Market is not particularly huge which might dissuade any Competitors from getting involved.

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• This Stock is rather beloved by the Bulletin Boards which can be very off-putting – Stocks that are largely ignored often make better Investments. However, bearing that in mind, I have looked thoroughly into LVCG and I am happy to take the plunge but will not be buying a huge position in it unless something gives me a very good reason to.

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• There is a lot of Takeover talk around LVCG on the Bulletin Boards and suchlike which may or may not have some foundation. I am in two minds about this – if there is a Takeover which gets me a chunky fast gain (100% Premium on what I paid for example) then it probably wouldn’t upset me too much but balanced against that is the downside that such a Takeover could mean missing out on much higher gains if I can be patient and stick with the Stock. It would be a high-class problem though !!

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• Events businesses are notoriously cyclical and a global recession could impact on LVCG’s ability to attract Attendees to the Shows and it could mean a lot less Events being put on. However, the reality is that such a cyclical risk affects 90% of Stocks so this is not necessarily a reason to avoid investing in LVCG.

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• Because Events are held overseas there is an element of FOREX risk – this can be managed by a switched-on Accounts function to a large extent with Currency Hedges etc. but it is a risk.

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• As a very small AIM Company LVCG will not be something that the vast majority of Fund Managers are allowed by their mandates to buy; so this hugely reduces the ‘pool’ of available buyers. However, if LVCG really delivers big time (ok, that is unlikely but it is an outside possibility) then it might grow to a size where Fund Managers are allowed to get involved – that would be a long time from now though even if it were to happen.

 
Please Note: Page 49 of the Shard Capital Report has a list of Risks that are worth reading through and thinking about.
 
Recent Trading Update
As I have hopefully already stated, I had been looking closely at LVCG for a long time before I actually took the plunge and bought an initial position. The main reasons for why I was waiting (apart from more general concerns about potential shocks from a disorderly Brexit etc.) were that although I really liked the LVCG story, I wanted clear evidence that Revenues were actually coming in and thereby making Profitability far more likely and also because I wanted to see the Shard Capital Broker Note which I knew was coming out.
 
After the Shard Report emerged, we got an Interim Trading Update on the 5th July and you can read that here:
 
https://www.voxmarkets.co.uk/rns/announcement/5125e87a-234b-46d8-95ae-42191c4405ae/
 
The Update starts off with these comments from the Chairman, David Ciclitira:
 
"At the halfway point of the year we continue to make encouraging progress with sales and have successfully secured 67% of our revenues for 2019 thus far. Enquiries remain strong for the Group's touring assets and it is my belief that we will exceed our current target of 60 events for 2019, with 52 events already confirmed and several more in the pipeline.”
 
I have put in Bold the bit about LVCG being likely to exceed the targeted 60 events and this is important when we get around to looking at the Shard Forecasts in the next section.
 
This bit about the Nickelodeon Deal is also noteworthy and this has potential to be very useful for LVCG:
 
“I also believe the recent announcement of the partnership with Nickelodeon UK Limited ("Nickelodeon") for the UK and Ireland is a big step forward for the business. The response to Paw Patrol has been positive and we are looking to fast track the building of the first Nickelodeon Jnr tour. Our aim is to build upon our relationship with Nickelodeon and see which exciting paths that leads us down.”
 
This next bit is worth reading carefully – it stresses the ‘high margin’ nature of the Tours and the bit about building more Touring Sets of Models beyond the 15 they have projected at the end of 2019. The last sentence also suggests they will be looking for the capability to build Models in other locations possibly abroad:
 
“The Company, through the acquisition of Bright Bricks Holdings Limited ("Bright Bricks"), has the unique ability to build its own assets and tours and bespoke assets for third parties. The ability to build and grow the number of tours, provides an opportunity to greatly increase the future earnings from the high margin touring business. We have received very positive reviews for our zoo touring assets, with some venues announcing a 30% increase in footfall. As a result, we expect to begin work, before the end of the year, on a new series of assets beyond our projected 15 tours as at the end of 2019. The Group will continue to explore opportunities, through its global network, to increase its building capacity to meet the high level of demand.”
 
The Update also includes details on how a new Non-Exec is to be recruited who will Chair the Remuneration Committee and how David Ciclitira is waiving the Bonus he is entitled to.
 
The table under the Heading ‘BRICKLIVE Events and Shows’ says that the number ‘Booked for 2019 as at 30 June 2019’ is 52 and ‘FY 2019 (projected)’ is 60. This backs up what David said in his initial statement about the likelihood of delivering more Events than are planned.
 
Other than that it is a very positive Update and they say they are in line with Expectations.
 
Valuation and Targets
If you go to page 38 of the Shard Capital Report, you should find a Table there which is headed ‘P&L Forecast Estimates – FY19 – FY21 (£m, unless otherwise stated)’ and down the bottom you should find ‘Adjusted EPS (p)’ and we have the following Earnings Per Share Forecasts:
 
FY19E – 0.4p
FY20E – 2.4p
FY21E – 5.0p.
 
At my Buy Price of 51.7p, this means for FY20 LVCG is on a Forward P/E of 21.5 (51.7 divided by 2.4) and then for FY21 LVCG is on a Forward P/E of 10.3.
 
For a very small Company which is in the initial fast growth mode, these are pretty attractive numbers and it is worth bearing in mind that 2020 will soon be with us and 2021 will be ‘Next Year’. It is not hard to see Earnings per Share up around 7p or more in 2022 and this would make my Buy Price look very good.
 
However, the most likely true picture here is actually a helluva lot better than it might appear from these Numbers (and it is already very attractive). Remember the bit about how the Target of 60 Events and Shows is likely to be exceeded, well the Forecasts I have used from the Shard Report are based on just the 60 Events I think – so the Forecast EPS Numbers are light.
 
It follows then that the Revenue Forecasts in the Shard Report could be very conservative. Here are the figures in their Report from page 38 as per the Table I used for the EPS Estimates:
 
FY18 - £5.351m (actual reported result)
FY19E - £6.555m
FY20E - £8.751m
FY21E - £10.860m
 
If LVCG manage to exceed the Revenue Estimate for FY19 then that would mean a higher starting Base level for FY20 and obviously this feeds through to FY21 as well. OK, LVCG must deliver on such Revenues and Profits but it looks to me like the Risks are to the upside (which makes the Forward P/E Ratios lower than my calculations above).
 
But that’s not all. The Revenue figure of £5.351m for FY18 was achieved with 34 Events having been delivered. Now we need to appreciate that the outcome for Revenue in future years will depend on the ‘Mix’ (in other words how many big Shows and how many smaller Tours as they have different Revenues, Margins and Profits), but for FY19 we have been told that they will deliver more than 60 Events so a rough fag-packet assumption would be that the Revenue doubles. But the increase in the Estimates is only 18.3% higher in FY19 compared to FY18 (6.555 minus 5.351 divided by 5.351 expressed as a %) – it’s obvious this looks low without even doing any in-depth analysis of the Results and the Shard Report.
 
At the time of writing this Blog on Thursday 18th July, the Closing Price for LVCG is 39p to buy which means the Forward P/E for FY20 is 16.2 (39 divided by 2.4) and the Forward P/E for FY21 is 7.8 (39 divided by 5.0).
 
On something which is at an early stage and where the opportunities for growth are abundant, it is very possible to set a Target that is too light but I find the best approach is to have some idea of a Target at the time of buying and then to keep reviewing this as time goes on and to adjust as seems appropriate when the story develops. On the information we have at the moment, and making some allowance for the fact that the Forecasts will most likely be beaten, I think a Target around 150p is quite realistic.
 
Conclusion
Something I really like about LVCG and which sets it apart from 95% of AIM ‘Story’ Stocks is that the Company is bringing in loads of Revenue already and there is a very clear and believable path to Profitability. So often I see people on Twitter saying things like “Numbers don’t matter” with regards to such Stocks and this is true to a point when they are in the hyped-up and exciting euphoria phase but there are no examples of a Stock that has been able to sustain a high valuation without reality catching up with it at some point. For me personally, I would rather buy proper Companies that are making Money than buy stuff purely on hope with the prayer that other people even more gullible than me will take the over-valued, low quality, Stock off my hands.
 
As I have explained above, the Estimates from Shard Capital look extremely light and this means it is very possible (and likely) that LVCG will exceed these Expectations and that could drive the Share Price higher.
 
Of course there are many Risks around LVCG as I have highlighted in the relevant section of this Blog but to me these are not a reason to not invest in LVCG – rather they are a reason to Position-size accordingly and to make sure you don’t have too much of your Portfolio in it. If you were to avoid all Stocks that had a bit of Risk and if you were seeking out ‘The Perfect Company’ I suspect you would have a very tiny Portfolio because you have to accept that all Stocks have some aspects that are less than ideal and you can never know everything about a Stock anyway.
 
For now I have my foot in the door and I expect to be buying more LVCG in the near future although I doubt this would ever become a huge Position in my Portfolio.
 
Cheers, WD.