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Sosandar – UK Investor Show Tip Update, Trading update and a couple of numbers: still a BUY

By Nigel Somerville, the Deputy Sheriff of AIM | Friday 18 May 2018

Disclosure: I own shares in one or more of the stocks mentioned. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

AIM-listed online women’s clothing play Sosandar (SOS) from the Adam Reynolds stable has announced its trading update for y/e 31 March 2018. This was my pick of the companies I saw and chatted to at the UK Investor Show, and so far the shares have performed admirably. Now it has produced a cracker of a trading update and I still rate the shares a buy, but it certainly is not a “widows and orphans” stock!

When I chatted to the company at UK Investor I can’t say I was hugely impressed with its communication with the market. Having previously offered two trading updates which were almost entirely devoid of any useful numbers – and which fell flat in the market - I suggested that perhaps offering numbers would help. After all, this was a near start-up so it doesn’t really matter how poor the early numbers are – what we need to see is the progression.

Wednesday’s trading update was far more detailed and went down very well, with the share pushing up to 16.75p (and finally above the IPO price). We got a number for revenue (£1.34 million), and H2 like-for-like sales were up 268% on the previous year. That’s decent enough growth, although I fancy there needs to be a lot more of that before Sosandar reaches profitability.

But reading through the numbers, I fancy that Sosandar is heavily underplaying its hand. In its interims (for the NINE months to December) it reported revenues of £861,443. Now for the full year to March the number of £1.34 million. So in just three months Sosandar has added half a million of turnover.

If we consider the 9-month revenue to December, it works out at around £95,715 per month. Yet in the three months to March it comes out at £160,000 per month. Take the middle point of both periods (mid-Aug and mid-feb) and we see revenue growth in six months of 67% - an average of 11.2% per month. That looks impressive enough – and suggests annual revenue growth of well over 100%.

But I still don’t think that tells the whole story, and here is why. We learn from the trading statement that:

Record monthly revenues were achieved in March 2018, and substantial momentum has continued into the new financial year.

Well, I would hope Sosandar is recording monthly sales records! But substantial momentum has continued into the new financial year doesn’t cut it for me – especially when we learn right at the end of the update:

…we recorded our highest monthly sales figure in March 2018 (which was subsequently beaten by a further 32% growth in April 2018)

32% growth in one month! That looks huge to me – and a long way north of the 11.2% per month implied earlier on. An update on current trading when the finals come out will be keenly watched for.

Now I’m no fashion guru: I suspect even Cynical Bear puts me to shame on that score! Maybe April marks the top of the season for online fashion – although I note that joint-CEOs Ali Hall and Julie Lavington tell us that (with reference to the April growth figures):

…demonstrating that our business is less seasonal than peers, and the speed at which we are growing.

Or maybe the sudden surge is because Sosandar has reached a point where its marketing has got through to a big enough audience, the customers like the clothes and having looked at the catalogue in the past, sales have really taken off (I note the growth in sessions from 543,000 to 1.47 million, but that is twelve months versus just seven from launch so increased traffic doesn’t fully explain the increased sales). I kind of fancy the latter explanation – which suggests that Sosandar’s growth has heavily accelerated, and I reckon the next few months will be critical to showing the potential of the company.

So how long might it take to reach profitability? Well, we don’t know how much it is spending finding customers. However, we are told that:

The cost of acquiring customers has shown improvement and halved over the last six months

In the nine months to December, Sosandar reported £861,443 of revenues, cost of sales of £452,000 and admin expenses of £2.54 million (ouch!!) The deemed cost of the reverse takeover was £1.4 million and a reverse acquisition cost of a further £1.5 million was recorded but those two last costs are on-offs.

Might we therefore consider (very roughly) that gross profit (ie before admin costs) runs at around half of sales? That would suggest that Sosandar needs revenues of around £7.5 million to reach break-even – assuming admin etc are about the same (which we don’t know).

In three months to March Sosandar clocked up revenues of about half a million. If 32% growth per month is maintained it will hit well over £4 million per month by next March. Even at 11% per month (maybe more realistic) we are up to almost £0.6 million per month (so annualised £7.2 million). My guess is a number somewhere in between and so long as the company is careful with its cash it looks to me very much as though Sosandar will be trading at break-even at the plc level before March 2019.

My feeling, when talking to the company at UK Investor, was that there was a passion and good knowledge of the market at the helm. Having passed (on balance) favourable comment (HERE) when the shares were just 12p to buy, I made it my tip from UKI (HERE) at 13p (mid). It was frustrating that under house rules I had to wait to pile in myself – so I had to cough up 15p for my little stash of shares. But I guess that is what you (the reader) pays for.

Sosandar is still highly speculative and there remains plenty that can go wrong. But I see enormous potential if the management gets it right (and the trading statement suggests that is not too pie-in-the-sky a view to take) so I am happy to take the risk.

Now at 17p (so I guess we’re all happy) to buy I am still minded to rate it a speculative buy, but I’d like to know the cash position which was not mentioned, and leaves me wondering whether Sosandar might want to rattle the tin. However, at December there was still £5.3 million and admin costs for 9 months was £2.5 million. It surely can’t have ploughed through £5.3 million of cash in three months!

As for a target price, it is really quite unknowable. So my inclination will be to pick up a few more shares as/when cash allows with a view to selling a chunk north of 30p, leave the rest to ride for free and then see what happens.

Sosandar is currently valued at just £18 million. At that price the upside hugely outweighs the downside, so I think it is well worth the risk.

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