NEW VERSION - Small Cap Value Report (18 May 2015) - SOM, BLNX, PMR, PLUS

18th May '15 by Paul Scott

37 comments 26212 reads

** Apologies, the original version of this report corrupted, so I have reconstituted it from backup**

Good morning! Running late today, as I had to take the car in for repairs & then walk home. Plus I've generally been faffing about on emails & Twitter - two things which I think fully explain the lack of productivity growth in the UK economy in recent years!

A reminder for Mello Beckenham tonight - the new CEO of Crawshaw (LON:CRAW) will be giving a talk, which I'm sure will be very interesting. The shares have roughly ten-bagged (possibly more?!) since Crawshaw last appeared at Mello, so I'm sure the celebratory drinks will be flowing! This stock is expensive currently, but it's a potentially exciting store roll-out - therefore I can see how, in several years time, the growth may well have caught up with & overtaken the current high valuation.

Somero Enterprises Inc (LON:SOM)

Share price: 136p (down 4% today)

No. shares: 56.2m
Market Cap: £76.4m

(at the time of writing, I have a long position in this company's shares)

AGM trading update - Somero has taken the unusual step of issuing its AGM statement a day early (the AGM is tomorrow - hopefully a friend is going, so he'll be able to let me know what management are like - I haven't met them yet).

It sounds positive, saying that, "Strong momentum has continued into 2015 with solid, broad-based growth across N.America, Europe, M.East, SE Asia, and Latin America with sales from the majority of our product lines".

Further positive commentary is given. The only fly in the ointment is that China has been sluggish in 2015 to date;

I think it's disingenuous of the company to play down the importance of China, since they did exactly the opposite in their final results, published only six weeks ago - when emphasis was put on growth in China, and what a huge market opportunity this represented.

Furthermore, China was 16% of 2014 revenues, so if it "currently represents a small proportion of the group's revenues", then that suggests there's been a big drop in sales into China.

Outlook - they've clearly made up…

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Joe91

18th May '15

Hi Paul,

I love reading your report and value your opinion, so please don't think I'm being picky, but just trying to understand how your comment on PLUS500 - "Personally I try to avoid all overseas companies listed on AIM, as there's usually something wrong with them." relates to your holding in Somero, which you agree is an American company?

Thanks.

Paul Scott

Hi joe91,

You're right, it's an inconsistency. After doing my research on Somero Enterprises Inc (LON:SOM) I'm happy to invest in it, because I don't see any funnies in the accounts, I understand its business model, which seems sustainable, it pays divis, and has a track record of about 9 years as a UK listed company.

So I wouldn't completely rule out investing in overseas companies on AIM, but the bar is set very high indeed before I'm comfortable investing in one.

As I've consistently said in my reports here, I always felt there was something not quite right with Plus500 (LON:PLUS). The accounts looked unfeasibly good, but they're paying fabulous divis, so that led me to believe that their accounts were probably true, but the profits were maybe not sustainable - as it looks like they were bending the rules on money laundering rules, and sooner or later they will run out of mug punters to exploit. There again, bookies are still going, and they exploit mug punters too, so who knows?

Regards, Paul.

Mark Simpson

Just my impression, of the FCA and other govt authorities is that if they suspect you are helping money launderers, then, rather than a raised eye brow, they will nail a certain part of your anatomy to the office floor.

I don't think that Plus500 (LON:PLUS) have fallen purely on the risk that they will get a fine from the FCA for not being tight enough on the Money Laundering Reg's. It is the risk that they have implemented this policy themselves to make it intentionally much harder for customers to remove their money than deposit money with them and the implication of the type of business they are if they would do this. Having had no direct experience of the business I have no idea if this is the case or not but the impression of risk is probably not helped by the FT blog questioning the sustainability of their margins etc.

A couple of weeks ago I had the idea of joining Plus500 (LON:PLUS) depositing a small amount to get any introductory bonus and seeing how easy it would be to trade that through and withdraw, purely to see how easy it was - the idea being that you could earn more by learning the real business model of Plus500 (LON:PLUS) and trading that than you could lose on their platform. Never really got round to it though and obviously it's too late now.

Given how easy it would have been to do for anyone financially experienced enough to be taking a position in the Plus500 (LON:PLUS) equity to do likewise to check them out I'm surprised there aren't more people with direct experience reporting back on here.

Edward Croft

In the year of our Lord 1432, there arose a grievous quarrel among the brethren over the number of teeth in the mouth of a horse. For 13 days the disputation raged without ceasing. All the ancient books and chronicles were fetched out, and wonderful and ponderous erudition, such as was never before heard of in this region, was made manifest.

At the beginning of the 14th day, a youthful friar of goodly bearing asked his learned superiors for permission to add a word, and straightway, to the wonderment of the disputants, whose wisdom he sore vexed, he beseeched them to unbend in a manner coarse and unheard-of, and to look in the open mouth of a horse and find answer to their questionings.

At this, their dignity being grievously hurt, they waxed exceedingly wroth; and, joining in a mighty uproar, they flew upon him and smote him hip and thigh, and cast him out forthwith. For, said they, surely Satan hath tempted this bold neophyte to declare unholy and unheard-of ways of finding the truth contrary to all the teachings of the fathers.

After many days more of grievous strife the dove of peace sat on the assembly, and they as one man, declaring the problem to be an everlasting mystery because of a grievous dearth of historical and theological evidence thereof, so ordered the same writ down.

Francis Bacon on PLUS 500, Globo, RCG et al... 1432.

Roger Lawson

Re Blinkx, it is of course possible to value a software company on other things than profits. I know because I sold one that did not have any and then retired on the proceeds twenty years ago. But one thing I did learn from my time in the software business: never use an accountant to value a software business because they are usually looking at the wrong metrics.
As regards Plus 500, I agree with Ed having once held the stock. Just read the AIM prospectus if you really want to get informed. Look at customer churn. And "breakage" of dormant accounts (or where folks don't provide identity info upon request) is another thing to look at. Incidentally ShareSoc did publish an AIM "Scorecard" a couple of years ago to enable you to weed out the duff companies. It's on our web site. It might take a bit of time to go through it, but it weeds out the questionable companies quite well.

lucien2k

Wow, I have been kicking myself for a while for selling Plus500 (LON:PLUS), but today I am quite happy.

When you watch a share going up and up, it does make you question whether you were wise to sell.

My concerns were always around their account practices, there were rumblings that they were refusing to pay out on some accounts. My feeling was that they were exploiting the losers and cutting off anyone that "won".

Sutters

Hi Paul, wrt SOM how do you reconcile your positive comments on continued future growth with the -18.8% EPS growth in the accompanying table?

Cheers

Roger,

I'm fully aware that businesses can be valued on things other than profit, but thank you for pointing it out anyway.

So how are you valuing Blinkx (LON:BLNX) currently then? Please do enlighten us!

To my mind, its legacy business seems to have gone badly wrong, and they warn of more margin pressure. So they can either cut costs, or exit problem areas - both of which are hinted at today.

With a complete lack of visibility, personally I wouldn't value Blinkx at anything above its current net cash. Or you could do a sum of the parts valuation on the bits which might have good future potential perhaps?

Blinkx isn't really a software business anyway. It's an advertising company.

Re AIM Prospectuses - very good point. Hardly anyone bothers reading them, but there are often considerable warning signs buried in the detail.

Re ShareSoc's AIM scorecard - yup, it was pretty good, I used it a few times when researching companies.

Paul.

Hi Sutters,

"wrt SOM how do you reconcile your positive comments on continued future growth with the -18.8% EPS growth in the accompanying table?"

Somero had a large tax credit in 2014, so the 2014 EPS figure is artificially high.

I explained this in my SCVR of 7 Apr 2015 - scroll down to the subsection "Taxation" in the £SOM section.

Also, there is a new commissioned research note out today here, which gives more flavour to how the business is performing.

Regards, Paul.

deucetoace

SOM in the year just gone had a large exceptional tax credit. I imagine that is why it shows a notional fall in EPS.

19th May '15

Paul, thanks for the invite to value Blinkx, but I'll decline. That would really be a hostage to fortune. I am not in the business of giving public prognostications like you are.

Funnymoney

Ed,

If you do not have the data regarding foreign status of stocks, could you add an upvote/downvote counter to each stock? I'm sure using the power of the crowd we could very quickly end up with a list which would enable us to screen for UK stocks only. It would only be a guide, but it would save a lot of time repeatedly looking at dross.

GrindertraderUK

I think it is a shame to publicly state that software companies can be valued by other means than for instance profit figures, but yet refuse to share your opinion what that may be.

The Stockopedia discussion boards are wonderful for sharing ideas and to enhance the knoweldge of all without the possibility of ridicule often seen in other forums.

Grindertrader: regret I do not have the time to provide an education on that subject - but there are plenty of articles on the internet about valuing technology companies and early stage companies (and before anyone says Blinkx has been around for years, the product offerings and the market in which it operates have been so rapidly changing that it's a fairly new business in many ways).

underscored

I agree Grindertrader. It is refreshing to have a forum for coherent adult discussion. It does seem that some people make a real emotional attachment to their stocks. A shame, and I guess why discussions of shorts on stocks which you hold a position in have had to be banned on this forum.

Rick62

Roger, I'm afraid you're completely wrong on Blinkx. They are neither a software company nor an early stage company (in the sense of valuation approaches that you allude to). They are a market platform for video advertising and are a complete disaster.

I bought a year ago following the Ben Adelman report, feeling that his comments were exaggerated (and could typically be applied to any media advertising). and the share price fall overdone. Since then turnover from legacy business is down about 40%, margins are down and under pressure as they seem to lose contract revenue for more competitive bid ('programmatic') revenue.

This has been one of my worst investments ever. Pauls analysis is spot on, probably generous. If you can find anything positive in their results or presentation I would be very pleased to hear it!

Thanks Paul (and Deucetoace), I hadn't spotted the tax credit.

Regards

WarrantStar

20th May '15

Paul

Thanks for you report on Somero Enterprises Inc (LON:SOM). However, I cannot share your enthusiasm when the figures that they have put out on 07/04/2015, (and are still showing on their clunky website) in their annual report showing EPS progression as follows:

2012A 2013A 2014E 2015E 2016E 2017E 2018E 2019E

EPS (c) (basic) 1.77 9.75 25.76 16.45 17.63 20.13 22.72 24.9

EPS (p) Adj dil 3.76 8.07 12.17 11.38 12.18 13.62 15.10 16.81

If I have made a mistake here then please could you put me right? But to me the above figures do not look at all like an attractive investment.

TMFMayn

21st May '15

Hi roger,
Perhaps you could devote part of the next sharesoc newsletter to educating us on valuing GBO and BLNX etc - it would make a bit of a change to reporting on those VCTs.
Mayn

TMFMayn: I'll consider whether it's possible to do that.

NEW VERSION - Small Cap Value Report (18 May 2015) - SOM, BLNX, PMR, PLUS

Somero Enterprises Inc (LON:SOM)

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Paul Scott

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