Time To Explore Lets Explore Group
“…With cash in hand, a new venture in a growing market, and an ambitious management team that has proven its ability to identify and develop a growth business, LETS seems an intriguing prospect – especially with a share price of just 2.65p and a market cap of £5m. With a seasonal product likely to generate a Q4 revenues boost, LETS promises to be a microcap worth watching over the coming months…”
After selling its location based virtual reality entertainment business for $25m earlier this year, the Let’s Explore Group (AIM:LETS) now has its sights on the discount grocery business, investing £3.5m in the acquisition of the Discount Dragon brand, which has expanded rapidly through the ongoing cost-of-living crisis. With a modest share price that has scarcely budged since the purchase, is this ambitious small cap flying under the market’s radar?
LETS is led by co-founder and CEO Martin Higginson, who has established several businesses, including Monstermob Group Plc, which grew to become a top 50 AIM listed business with a market capitalisation of £192m; NetPlayTV plc, an interactive TV gaming business; Digitalbox Plc, a digital media business; and Cityblock plc, a luxury student accommodation venture. Non-Executive Chairman Sir Robin Miller is a former CEO of the international media group Emap plc.
The company entered 2023 with three divisions: Location Based Entertainment (LBE), Home Based Entertainment (HBE), and a smaller subsidiary, Uvisan. LETS took advantage of post-Covid trading conditions to develop its LBE business, opening 11 new sites, and entering a three-year framework agreement with Merlin Entertainments. By December, the LBE estate had 491 headsets in operation across 53 sites, and was offering new content including ‘Gorilla Trek’, which earlier this year won a Lumiere award in the ‘Best Use of VR’ category.
The company’s last set of annual results reported a 62pc increase in LBE revenue to £10.2m (2021: £6.4m), contributing to a 23pc increase in revenue from total operations to £11.6m (2021: £9.4m). Adjusted EBITDA from total operations increased by 51pc to £1.4m (2021: £0.9m), and gross profit to £5,016,000 (2021: £3,196,000), a gross profit margin of 43pc (2021: 34pc). Total loss after tax was reduced to £661,000 (2021: £1,999,000).
LBE’s robust performance drew attention from LBE Bid Co Inc, leading to a $25m sale concluded in February, on the basis, according to the LETS board, that ‘certainty, in what was quickly becoming a very uncertain world, was the right decision for our shareholders’. The Uvisan business was also sold, allowing the company’s half-year results to the end of June to report sales proceeds of £18,964,000 net of costs. A further payment of £1m in respect of repayment of the loan note from the buyer of the LBE business is due next February.
After completing the two sales LETS returned the majority of the proceeds to shareholders through a tender offer process which concluded in June with a total of £12,527,000 distributed. But – as at 31 June – the company still had £6,827,000 cash on hand, excluding the loan note due to be repaid next year, sufficient to pursue its stated aim on announcing the sale of the LBE division to acquire ‘ownership or control of a growing business that needs development capital to take it to the next stage of its development’.
Immersive learning
While on the lookout for a new venture the company decided to hold on to its Home Based Entertainment (HBE) business, the company reporting that given ‘the level of demand seen, we have … taken the decision in the meantime to retain this business unit as, given the knowledge we now have in online retailing, our new B2B relationships and the capacity to purchase more stock, the potential of this business can be explored further.’
LETS’s HBE business comprises the Let’s Explore range of immersive learning products, accessed through its Vodiac smartphone-powered VR headset. Each product pack, priced £99, comes with the headset, a range of VR experiences, a holographic cube which unlocks a selection of in-app augmented reality experiences, a full-colour hardback fact book, a sticker book, a giant poster, and an interactive mode, and are marketed to consumers through outlets including the QVC TV shopping channel, Amazon, Facebook, and other social media channels. The range seeks to take advantage of studies indicating that immersive learning is three-quarters more effective than traditional instructional methods. Let’s Explore Oceans, for example, one of three flagship products, including Let’s Explore Space and Let’s Explore Wildlife, was produced in partnership with experienced underwater cinematographers, VR camera system designers and marine biologists.
LETS’s half-year report stated modest sales for the period of £62,000 (H1 2022: £103,000), contributing to divisional adjusted EBITDA loss of £175,000 (H1 2022: £151,000). But the company says the HBE business is predominantly ‘a Q4 focused business, with the first half of the year being about investment into the development and planning of new products’. Expecting to ramp up sales as the Christmas period approaches, LETS intends ‘to expand the product range as well as the territories in which they are sold over the coming year.’
LETS enters the discount market
The company announced its heralded new purchase last month, entering into a conditional sale and purchase agreement for the acquisition of the entire issued share capital of Huddled Group Limited for a total of £3,950,000. LETS will pay an initial £3,450,000, with a deferred payment of £500,000 due in April 2025. LETS sees significant opportunity for growth through Huddled’s trading business Discount Dragon, which sells surplus, mis-packaged, and close-to-their-best-before-date items for significant discounts to mainstream grocery market, noting that the UK market share for discounters has increased more than fourfold in the last 15 years as consumers have struggled with rising costs and flatlining incomes.
The Huddled Group has recorded impressive growth since commencing trading in 2020, and has increased monthly revenues by 500pc since last August, Discount Dragon’s revenues soaring from £75,000 to £450,000 over the period. Huddled has already sunk significant resources into the trading business, investing in a rebrand, a new warehouse management system, and securing coverage in The Sun, The Daily Mirror and ITV’s This Morning. Huddled also acquired the stock of Discount Dragon’s main competitor, Motatos UK. LETS is aiming to ‘optimise and grow the business through investment into marketing, warehousing and provision of deeper product offering in key categories’.
The company’s claim that the ’market for discounted groceries has never been more relevant’ has resonance as the cost-of-living crisis continues. Though average wages are now growing faster than consumer prices, and inflation appears to be subsiding, the gains are offset by higher taxes and mortgage payments and the end of government cost-of-living payments.
A new Resolution Foundation report notes that much of the increase in annual mortgage costs caused by rising interest rates has yet to be passed on to households because many have so far not had to renew fixed-rate mortgage deals: bills for those needing to remortgage next year could rise by £3,000, leaving the typical disposable income of borrowers projected 7pc lower in 2024-25 than in 2021-22. And the freezing of tax thresholds until 2028 means growth in post-tax pay will be much slower than in gross pay. The Foundation estimates that real disposable income for a typical working-age household, which has fallen by 4pc over the past two years, will flatline in 2024-25, and that the poorest 50pc of households, will see their disposable income fall by another 1pc.
Outlook
With cash in hand, a new venture in a growing market, and a management team that, with the sale of the company’s LBE division, has proven its ability to identify and develop a growth business, and sell it for at a significant profit, LETS seems an intriguing prospect – especially with a share price of just 2.65p and a market cap of £5m, which, prior to last month’s acquisition, was much less than its cash in hand. Indeed the price has fallen from levels of around 4p in the summer, reflecting the returning of cash to shareholders subsequent to the LBE sale: the Huddled Group purchase seems to have been barely been registered by the market. With a seasonal product likely to generate a Q4 revenues boost, and an ambitious management keen to make the most of a promising new purchase, LETS promises to be a microcap worth watching over the coming months.
