Small Cap Report (29 May) - MBH, QPP, TRK, NBL, IDOX, DGB

Wednesday, May 29 2013 by

Pre 8 a.m. comments

Firstly, just on a house-keeping matter, I'd like to flag up a free Webinar that Stockopedia are holding today - i.e. an online tutorial in how to get the best out of Stockopedia. It's at 12:30 today! I've signed up for it, as there are so many great features buried in this website, that you might never find unless you are shown them. There are only a few places left, so if you're free at 12:30 then I encourage you to sign up here.


Michelmersh Brick Holdings (LON:MBH) announce the sale of a 15 acre site in Telford for £4.6m in cash, with £3m deferred for 1-2 years. That will put a bit of a dent in their £18.4m net debt. There looks to be a lot more property on the balance sheet too. I remember meeting the management some time ago, and thinking they had a pretty marginal business on the brick-making side of things, but who knows it might pick up if & when we finally start to build enough affordable houses in this country for the number of people who actually live here now!

So Michelmersh is really a special situation based more around its property assets than its operating business.


Quindell Portfolio (LON:QPP) have announced a 3-year deal with Honda. As usual, it's all couched in language which obscures what the deal actually is. But from what I can make out, it's based around the low margin business of supplying credit hire cars through Ai, which provides the bulk of Quindell's turnover, yet only £3.5m p.a. profit. The rest of Quindell's profit comes from mysterious software revenues that have apparently sprung from nowhere.

Accident Exchange and Helphire also provided similar deals (I recall ACE having one with Audi). Quindell claim that they manage a much broader range of services, and co-operate with insurers, as opposed to trying to fleece them with excessive charges, which was arguably the business model of other operators in this sector in the past.

Quindell also claim to have a, "continued focus on an ethical approach for the industry"! Well it's a pity they don't seem to have adopted an ethical approach towards their stock market announcements, since they blatantly misled the market over the true nature of their Placing in December 2012 - which was not a Placing, but was actually some kind of derivative-backed equity financing credit line. We're still not clear on what they actually did, despite two so-called clarification statements. Let's hope the imminent Annual Report might shed some light on their derivatives shenanigans? And the mysterious £15m loan to an unnamed third party.

I remain of the view that this company has raised enough red flags to be treated with a healthy dose of scepticism.


A tax credit (probably for R&D) has enabled Torotrak (LON:TRK) to just scrape into a tiny profit for year ended 31 Mar 2013, according to their results issued this morning. I think we'll probably all be dead by the time this technology finally takes off, it seems to move at such glacial speed. Also, I'm always suspicious of any single product blue sky companies which then adopt some other sidelines late in the day to keep them occupied - because it makes you wonder if they realise the original technology won't generate enough excitement (or any profit) to justify keeping all the overheads of a Listed company and management salaries?

They do seem to have some substance there, in the relationship with Allison, but £52m market cap at 30p/share, really?! It looks pretty bonkers to me. Even allowing for the net cash of £8.9m, how much of that cash is going to find its way to shareholders? Probably none, as it will in all likelihood be burned up in the lean years when they don't get big licence payments. Overheads are running at about £6.5m p.a., so that cash pile could pretty much disappear in one lean year - after all, that's what's happened in the past.

Good luck to those that believe the story, but at a £52m valuation I think risk/reward looks badly wrong from an investment point of view.


Even though they are not Listed, FinnCap have put out an RNS saying that they've had a good year. Good for them I say, as FinnCap are tremendously helpful to the private investor community, hosting many events at their London offices for companies (not just their own clients either) to meet investors. I've been to many of these, such as the Mello Central events organised by my friend David Stredder, and others, and very useful they are too. So thanks to FinnCap for taking this innovative approach, and recognising that private investors do actually matter, and helping us get access to company management teams at FinnCap's offices.



Post 8 a.m. comments

As an aside, I keep hearing journalists going on about how the Indices are at or near their all-time highs, but this is nonsense because Indices generally are not index-linked for inflation (I heard that the German one is, but others are not). So the FTSE 100 being 6,900 in 1999 actually translates into 9,800 now, if you re-rate it in line with RPI over the intervening 14 years!

Therefore in reality we are nowhere near the market all-time highs. On a PER basis the UK market is priced around the long term average level, and is certainly not over-priced at all. So it seems to me nonsensical to be calling a market top & hence to become bearish.

Furthermore, company earnings rise by more than RPI usually over the long term, and with interest rates ultra-low you would expect equities to be relatively attractive to investors. Therefore, whilst I accept there are pockets of over-valuation, particularly with aggressively rated growth stocks that have been carried too far by momentum, overall I reckon it's more a case that equities were far too cheap last year, and have just got back to a more sensible valuation now. Rather than being over-valued & set for a fall. That said, a short-term 5-10% correction looks overdue.

However, I'm not an economist or forecaster, so these are just my general opinions & musings, and as always should not be relied upon by anyone.


Next I've been looking through the accounts for the six months ended 28 Feb 2013 from Noble Investments (UK) (LON:NBL). I've not looked at them before, as I assumed from the name that it was some sort of investment company, but it isn't. They are actually a fine art & rare coin dealer & auctioneer. Might be interesting, given that alternative assets seem to be in vogue, given low returns on cash.

Their asjusted EPS has dropped from 12.47p to 5.81p, although this seems to be due to the timing of a large auction that will be in H2 this year. That in itself makes me nervous, as to how predictable earnings are? Also I can't help feeling that the ludicrous prices paid for collectables are a big asset bubble, that at some point could come unstuck.

So although Noble doesn't look expensive on a forecast PER of 11.2, and forecast dividend yield of 2.6%, I think there are probably better opportunities elsewhere. It's got a fairly sound balance sheet too, although this type of business has to run a large stock position just to operate, so that is not really surplus capital.



Profit warning of the day

Idox (LON:IDOX) shares have dropped 22% this morning on a trading statement that clearly the market doesn't like.

I'm not familar with this company, it's a software group (public sector, and engineering) with a market cap of £124m based on today's share price of 35.75p.

Their warning today doesn't sound too bad, in that they say full year EBITDA "is likely to be no less than £18m" - I am told that previous guidance was £21m, so not a horrendous miss. This is based on a 31 Oct year end.

So multiplying the existing forecast EPS by 18/21ths arrives at 3.4p adjusted EPS for this year, hence the shares look fairly good value on a PER of just over 10. Might be worth a look perhaps?

I don't like their last reported Balance Sheet though, which has £71.3m intangibles. Write off those, and you have negative net assets to the tune of £32.5m which pretty much rules it out for me. Also, I don't like the way some software companies deliberately muddy the water between amortisation of goodwill (which is unconnected with trading or cashflow), and development spending (which is a real cash cost).

Hence EBITDA, and adjusted EPS, is generally an unreliable (i.e. over-stated) measure of true profits in this sector, in my opinion. I note there is also £13.5m in deferred income as at 31 Oct 2012, which is in reality additional debt - i.e. that amount of cash has been received up-front, but no services yet provided. So to be truly prudent one should add deferred income onto net debt, which would take net debt up from £21.5m to £35m, which is too high in my view.

So on balance, this one's not for me.



Results from Digital Barriers (LON:DGB) look absolutely dreadful! I've always been very sceptical about this company, and although turnover has risen to £23.3m (up from £15m) their operating loss has ballooned to £10.8m! If they carry on at that rate, then the cash pile will be gone by the end of this calendar year by my back of the envelope calculations. Also, a lot of turnover seems to have ended up in debtors, which is usually a bad sign.

This one just looks like an accident waiting to happen in my view.



OK, that's about enough numbers my brain can cope with for one morning, so I'll sign off for today.

Will be interesting to see what the Stockopedia Webinar is like starting shortly today at 12:30, I'll be tuning in - details at the top of this article for any late stragglers!

Regards, Paul.

(of the companies mentioned today, Paul has no long or short positions in any of them)


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Michelmersh Brick Holdings Plc is a United Kingdom-based company engaged in the manufacture of clay bricks, tiles and pavers. The principal activity of the Company is the management and administration of its subsidiary companies. The principal activity of the main trading subsidiary company is the manufacture of bricks, with another subsidiary operating a landfill site. The Company's segments are Building materials and Landfill. Building materials segment is engaged in the manufacture of bricks, tiles and building products being principally facing bricks and clay paviors at Blockleys-based in Telford, Shropshire; Charnwood-based in Shepshed, Leicestershire; Freshfield Lane-based in Danehill, West Sussex, and Michelmersh-based in Romsey, Hampshire. The Landfill segment is engaged in landfill operations, through New Acres Limited, which is-based in Telford, Shropshire. The Company's brands include Blockleys, Charnwood, Freshfield Lane, Michelmersh and Hathern Terra Cotta. more »

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Quindell Plc is a United Kingdom-based technology company. The Company is engaged in the provision of software, consulting and other services, or technology enabled business process outsourcing services. The Company is focused on serving the insurance sector. The Company delivers technology solutions or utilizes technology in providing services. The Company operates through two divisions, which include Solutions and Services. The Company's Solutions division provides software, business and technology consulting services, white labelled solutions, e-commerce, software as a service (SaaS) solutions, telematics services, insurance broking services and other services. The Company's Services division provides healthcare and property services. In the United Kingdom and North America, it offers insurance technology solutions. In Canada, the Company provides physiotherapy and rehabilitation services. more »

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Torotrak plc is a United Kingdom-based company, which develops, licenses and sells low carbon technologies, for application in a range of automotive sectors and vehicle types. The Company's operating segments include license agreements, engineering services and development activities, which include research and the creation of intellectual property. The Company's technologies include Flybrid kinetic energy recovery system (KERS), V-Charge and Main Drive Transmissions. Flybrid technology consists of Flybrid passenger car KERS, Flybrid KERS composite flywheel, Flybrid clutched flywheel transmission (CFT) and Flybrid Volvo testing at Silverstone. V-Charge is a variable drive supercharger for gasoline and diesel engines, which allows downsized engines to maintain their emissions levels. The Company's main drive infinitely variable transmissions (IVTs) combine toroidal traction drives variator with other conventional transmission components. more »

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  Is Michelmersh Brick Holdings fundamentally strong or weak? Find out More »

22 Comments on this Article show/hide all

shanklin100 29th May '13 1 of 22

Hi Paul

Re MBH, there are a lot of land assets and I essentially agree with your analysis.

In terms of operating profitability and cash flow from the brick business, I understand the depreciation is considerably greater then the investment needed to maintain these assets so, even at marginal profitability, there is enough incoming cash to service their debt and gradually pay it down, as is reflected in the last FY results..

Cash from property sales will help with this.

Cheers, Martin

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Paul Scott 29th May '13 2 of 22

In reply to shanklin100, post #1

Good points Martin, thanks.

I noticed the cashflow looked pretty positive in the last set of results from Michelmersh Brick Holdings (LON:MBH) .
Also, I like the niche market approach that MBH have taken, going for more up-market housing developments (e.g. self-build).

Once tax on land disposals is taken into account, and the very likely long timescales, and therefore the opportunity cost of tying up one's money in the shares for years, with no divis, I'm struggling to find much exciting upside in it. Although I note that Stockopedia broker consensus shows commencement of a 0.5p divi in 2014.

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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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