Small Cap Report (19 Feb) - SUN, SFR, PDG, VLX, SNX

Tuesday, Feb 19 2013 by

Pre 8 a.m. comments

It will be interesting to see how the market reacts to today's Trading Update for the year ended 31 Dec 2012 from Surgical Innovations (LON:SUN). SUN make equipment for minimally invasive surgery, and at 7.2p per share have a market cap of £29.2m.

Of the £5.6m orders intended for delivery in H2 of 2012, £1m slipped into the first week of 2013, due to capacity constraints at their Leeds factory, and a delay in US regulatory approval in Dec 2012. Those sound like valid reasons for 2012 falling short of expectations, so turnover will now be £7.6m, against forecast of £9.1m (according to Stockopedia's market consensus figure shown in the StockReport here).

The shortfall in 2012 will be a flying start to the 2013 figures of course, so given that we're in a bull market, this might be seen in a glass half full way? Gross margins have improved 3 points to 50.3%, which is positive. They only mention adjusted EBITDA, and not profit, which is slightly ahead of 2011 at £2.85m (versus £2.8m).

So at a 50% margin, £1m of sales would equate to delayed profit of £0.5m, and by my calculations that means they would have hit market consensus profit had it not been for the one week delay. So if I held these shares, I wouldn't be panicking over this.

Interestingly, they are increasing capacity, part funded by the award of a £5m RGF, which I think stands for Regional Growth Fund.

These shares had an amazing run from 2009 to 2011, ten-bagging from 1p to over 10p, but have since fallen back to 7p. With EPS having been fairly static for 3 years around 0.45p, which puts them on a PER of about 15, in my opinion they look fully priced. Also there is no dividend, which I see as a significant drawback. So this one's not for me at this price.


Structural steelwork company Severfield-Rowen (LON:SFR) got itself into a bad position by losing control of some contracts, warning on profit, and having issues with too much debt. The shares have got off lightly so far in my view, since a fall to 77p gives it a market cap of £70m, which given the uncertainty and likely losses for 2012 seemed generous.

It looks like they are kitchen-sinking it today, with a Trading & Financing Update that has a series of hefty provisions totalling about £20m, being taken on 9 problematic contracts. So this situation just boils down to poor management - i.e. not managing costs properly, and/or under-pricing contracts. Basic stuff for any business surely, so this is a deeply unimpressive situation.

The bottom line is that they are planning on tapping shareholders for a whopping £50m, and it looks like the banks will be supportive, as you would expect, since shareholders are stumping up the money to get the banks off the hook!

This all looks bearish for the share price, since a substantial new equity fundraising of £50m will have to be priced at a deep discount given that the market cap is £70m now. So it wouldn't surprise me to see these shares halve from their present 77p, or even more, it all depends on how much the shareholders financing the new shares want to dilute other existing shareholders. A deep discount on a rights issue effectively forces everyone to participate. Or the company might just do a Placing, which is quicker & cheaper, but upsets people who are not invited to participate.

 (this section of the report was published just before 8 a.m., which is a new idea I'm trying out to get a time-sensitive report out just before 8 a.m., then follow up with more detail around 10 a.m.)


Post 8 a.m. comments

Here is the second part of today's report, with less time-sensitive comments.

SFR has not fallen as much as I expected (yet), so it's clear the share price is being supported. This could present a good shorting opportunity at 71p, in my opinion.

People who say the UK economy is not recovering are missing a trick. The housing market is buoyant, with housebuilders now in rude health, and also the car market is recovering - as evidenced by upbeat results & outlook statement from Pendragon (LON:PDG) this morning. Their underlying profit before tax is up 18%, although it's a wafer thin margin of just 1% of sales. Uderlying EPS fell 13% from 2.3p to 2.0p.

This is guesswork, but I could imagine EPS rising to 3-4p in an economic recovery, as operational gearing kicks in, so at 20p PDG shares might end up looking cheap in a year or two's time? They are on a PER of about 10 right now, which is hardly expensive, although there is a lot of debt, but that is revolving finance for their stock, so asset-backed. Their interest cost is falling rapidly, from £54m in 2011 to £30m in 2012.

I might look into Pendragon in more detail when time permits. They say that, "vehicle markets are recovering in the UK and in 2013 growth is expected in new, used and aftersales". Pretty good.

On the other hand, looking at PDG's 12 month chart, the shares have had a fantastic run recently, and I would find it very difficult to buy them now, after such a rise.

I might wait for a pullback to around 18p before dipping into this one. If I miss it, so be it, there are plenty more fish to fry!



l suspect this is why equity markets are surprisingly resililent, when big ticket things like housing & cars recover, then investment comes back, and that tends to flow into a broader economic recovery. Hence why I'm much more bullish on the economic outlook than most commentators. I think we should be positioning ourselves for a cyclical recovery, and looking at shares which have operational gearing - i.e. where a relatively small rise in turnover feeds through to a big increase in profitability - so companies with a mainly fixed cost base, and high gross margins are ideal.




I note that recent Director buying has put a rocket under shares in Volex (LON:VLX). They were up 15p yesterday, and another 5p today to 118p.

All well and good, but remember that the CEO cashed in several hundred £k of share options just 2 weeks before the last profits warning.

Surely this should be investigated?

Volex has some appeal as a recovery situation, but they have been very accident-prone, so personally I'm hovering on the sidelines with this one, not willing to commit yet. It's a very low margin business, whose customers continuously squeeze out any profit margins VLX manage to build. I prefer businesses with more pricing power, as profits tend to be more resilient.



To access the simple, colour-coded table of Director deals, just hover your mouse over the "Accounts" tab at the top of the Stockopedia StockReport, and "Directors Dealings" is the last option from the pop up menu.









Synectics (LON:SNX) announce that they have renegotiated the terms of a previous partial acquisition, which has enabled them to acquire the remaining 49% of a German security company called Indanet AG for a final cash payment of E1.64m, instead of the previously agreed earn outs up to E8m. Sounds positive, but they don't state how Indanet is trading, so we don't really know.

I am meeting with the Synectics Directors for lunch next Wednesday 27 Feb after their results, so if you have any points you'd like me to raise, then feel free to leave a comment after this article. I always read all comments, and respond where needed. It looks a good company, but as with so many shares at the moment, recent rises mean the valuation is probably now about right.


That's it for today. Did you find the new pre-8 a.m. report useful? Should I carry on with that idea, or doesn't it make any difference to you? Let me know through the comments below.

Regards, Paul.

(of the companies mentioned today, Paul does not hold long or short positions in any of them)


As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested.

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Surgical Innovations Group plc is a United Kingdom-based holding company. The Company is involved in the design, development, manufacture and sale of devices for use in minimally invasive surgery (MIS) and industrial markets. The Company operates in three operating segments: SI Brand, OEM and Industrial. The SI Brand segment is engaged in the research, development, manufacture and distribution of SI branded minimally invasive devices. The OEM segment includes the research, development, manufacture and distribution of minimally invasive devices for third-party medical device companies through either own label or co-branding. The Industrial segment is engaged in the research, development, manufacture and sale of minimally invasive technology products for industrial applications. The Company sells branded products through independent healthcare distributors across the world and owns label products through original equipment manufacturer (OEM) relationships. more »

Share Price (AIM)
Mkt Cap (£m)
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Severfield plc, formerly Severfield-Rowen plc, is a United Kingdom-based specialist structural steelwork company. The Company's core construction sectors consist of commercial offices, industrial and distribution, stadia and leisure, retail and data centers and other. Its core infrastructure sectors include transport, power and energy, and health and education. The Company, through its subsidiaries, Severfield (UK) Limited, Severfield (Design & Build) Limited and Severfield (NI) Limited, are engaged in steel fabrication and construction. Severfield (UK) Limited operates manufacturing facilities at Dalton, North Yorkshire and Lostock, Lancashire. Severfield (Design & Build) Limited, located in Sherburn, North Yorkshire, designs, fabricates and constructs structural steelwork and portal frames principally for the warehouse, distribution and industrial sectors. Severfield (NI) Limited delivers constructional steel products in the United Kingdom and Irish structural steel market. more »

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Mkt Cap (£m)
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Pendragon PLC is an automotive retailer. The Company is engaged in the retailing of used and new vehicles and in the service and repair of vehicles. It operates in eight segments: Stratstone, which comprises its vehicles, truck and commercial vans brand, sale of new and used motor cars, motorbikes, trucks and vans together with aftersales activities of service, body repair and parts sales; Evans Halshaw, which comprises its volume brand, aftersales activities of service, body repair and parts sales; Quicks, which include its used car operation and associated aftersales activities of service and parts sales; California, which include its retail operation in California and associated aftersales activities of service and parts sales; Leasing, which include its contract hire and leasing activities; Quickco, which includes its wholesale parts distribution under the Quickco name; Pinewood includes activities as a dealer management system, and Central, its head office function and activities. more »

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  Is Surgical Innovations fundamentally strong or weak? Find out More »

14 Comments on this Article show/hide all

shanklin100 19th Feb '13 1 of 14

Hi Paul

I'm not too worried about whether you post before or after 8 a.m. The quality of your analysis, albeit I disagree with some of it, is why I read your daily reports.

What would be helpful is if the associated e-mails, alerting us to the fact you've posted arrived rather more promptly. Looking back over the last month, I have never received the e-mail before 15:00, which is unfortunate given the effort you put in to publish something before 10 a.m.

Best wishes, Martin

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Paul Scott 19th Feb '13 2 of 14

In reply to shanklin100, post #1

Hi Shanklin,

Many thanks for the feedback.
It's worth bearing in mind that I only have a few minutes to give a quick-fire opinion on each share, so it's only a snapshot, rather than detailed analysis.

That's a great point about the emails - at the moment it's my old email list from my Blog which sends out the link from Google at about 3:30pm. I'll speak to the guys at Stockopedia about whether we can get an email facility set up here to send out my morning report by email as soon as it's published.

Thanks for flagging up this issue, very helpful!

Regards, Paul.

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shanklin100 19th Feb '13 3 of 14

Hi Paul

No problem re the fact that its not detailed analysis.

Its always interesting to get other people's views as I DMOR.

Cheers, Martin

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MrContrarian 19th Feb '13 4 of 14

Entrée then pudding after 8am is a great idea.

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floorlord 19th Feb '13 5 of 14

"RGF, which I think stands for Regional Growth Fund" - correct. Can I have one? ;-)

Yet another good report, superb consistency. Like you say, a snapshot but a useful way to flag up what may have passed under my radar for further research. Many thanks. Totally in agreement on your comments re. the UK economy and gradually shifting market sentiment. There will be jittery times but I doubt they will signal anything too bearish.

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Gostevie 19th Feb '13 6 of 14

I really enjoy reading these reports and find them really helpful.

Personally I'm happy to wait until mid-late morning. Maybe just do a really early one occasionally if something particularly time-sensitive comes along.



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Ramridge 19th Feb '13 7 of 14

Hi Paul
This two tier reporting sounds great and all for it. I will personally wait until the in depth analysis before acting. Who knows a nasty surprise such as a big pension deficit might be buried in accounting note 139 on page 35!
Regards, Ram

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extrader 19th Feb '13 8 of 14

Hi Pauly,

Never mind all this share gubbins.... tell us how your half-marathon went !!


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Edward Croft 19th Feb '13 9 of 14

In reply to paulypilot, post #2

Hi Paul - we are going to work on alerts and notifications in general a little later this year. We could though probably put out an email alert on your morning report to all who are following you/your column. Lets discuss.

Blog: Follow @edcroft on Twitter
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ericb 19th Feb '13 10 of 14

Paul, i always get the alert via twitter. i think the 2 tier can be useful in some circumstances but wouldnt want to put you under pressure to 'get something out' and choose which is the most important. often the market reaction is quite different to what might be expected to certain statements.
great to read your reports and see your analytic aspect from your accountant background, which is quite specific compared to some who write to impress rather than just simply state the facts as they see them.
I do hope that Stocko can develop an offering that will smash ADVFN with live prices, L2 / 3, decent portfolio management, alerts, alarms, watchlist and maybe even BBs.

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Ramridge 19th Feb '13 11 of 14

In reply to ericb, post #10

Eric - I guess the boss, Edward, has some serious thinking to do. Should Stocko be a generalist website, offering everything but not as well as a niche player ( a la Debenhams), or concentrate on some features and not others? To have full breadth and depth and smash the competition to smithereens I guess is not possible or too costly. Or he can always throw the MBA stuff out of the window and simply react to what the users are demanding.
Regards, Ram

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Dinocras 19th Feb '13 12 of 14

Hi Paul - Always read your morning report - essential reading for me. The 8am starter is nice but not of great value to me; so if it takes a lot of extra effort I would say just focus on the main report. Keep up the good work.

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Paul Scott 19th Feb '13 13 of 14

In reply to shanklin100, post #1

Hi Shanklin,

I forgot to mention, I always Tweet immediately after publishing each report every weekday.
So to get notification of publication & a link to each article, just follow me on Twitter, @paulypilot should you wish to. But we'll try to get a better email list sorted out too.

Regards, Paul.

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Paul Scott 19th Feb '13 14 of 14

In reply to Dinocras, post #12

Hi Terry,
Thanks for the feedback. The pre-8 am report is dead easy to do - I just finish a paragraph, hit send, and then carry on writing for the full report. So I'll keep going with it I think. Negligible extra work, but might prove useful for some early birds!
Cheers, Paul.

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About Paul Scott

Paul Scott

Paul trained as an accountant, then spent 8 years as FD for a ladieswear retail chain.He became a professional small caps investor in 2002 to date.Paul writes a small caps report for on weekday mornings. He joined Fundamental Asset Management Ltd as a research associate in 2014, as part of their Small Cap Value Portfolio team. more »


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