Small Cap Report (4 Mar) - TRCS, CAP, GDP, BEG, TNG, SAG, TSTL, DEB

Monday, Mar 04 2013 by

Pre 8 a.m. comments

I like the interim results from Tracsis (LON:TRCS) issued this morning. At 160p the market cap is £40.2m, although they have accumulated over 20% of that, at £8.5m in net cash. This is impressive for 2 reasons: firstly that the profits are real, and not accounting trickery, and secondly that management are prudent in not letting this cash burn a hole in their pockets.

Profit is well up on last year, but slightly down on the exceptionally strong H2 last year. I was very impressed with management when they presented at an investor forum organised by Equity Development in January, but I'm still concerned about how sustainable these impressive results are? Over half the turnover in H1 this year came from "condition monitoring technology", which as I recall is hardware sales (to continuously report the condition of e.g. overhead power lines or points on the railway, in order to flag up an impending failure before it actually happens), so there is a risk these are one-off sales, and may not recur.

I'd need more comfort about the sustainability of future sales before taking the plunge here. There needs to be more clarity on the order book. This isn't helped by the broker forecast on Stockopedia showing turnover and profit forecast to halve in year-ended 31 Jul 2014. Perhaps if any reader has information in this regard, they could clarify in the comments section below. So it's not for me at the moment, but remains high on my watch list. The number one rule of investing is that you have to be sure profits are sustainable before you can value a business on a multiple of those profits.


Post 8 a.m. comments

Clean Air Power (LON:CAP) is my one blue sky punt - they seem to have interesting technology (which allows diesel-engined HGVs to operate mainly on liquid gas). The share price has been wildly gyrating of late, but it looks to me as if the company is adequately funded for the time being, having done a fund raising in Sep 2012 to raise £3.35m. Also they are actually selling the product, and orders have been increasing quite rapidly of late (see trading statement from 6 Feb). So the £13m market cap at 7.5p share seems reasonable to me.

Anyway, they've announced today the award of a 2 year research grant from the UK Government, at Brunel University. It is not quantified, so whilst nice, is not really a lot of help in valuing the company, so I have mentally filed it in the section of my brain which is allocated to PR announcements, rather than anything earth-shattering.


I have two golden rules with my personal portfolio, that I don't invest in overseas companies listed on the UK market (as I've lost too much money on this in the past, and one has to be suspicious of their motives for listing here in the first place), and I don't touch the resources sector.

Both of these rules were simultaneously broken when I bought some shares in Goldplat (LON:GDP) at 11.5p. It's an African gold miner, but its main operations are recovering gold from machinery sent to it by other miners, and hence it can better be regarded as a support services company, in a profitable niche. It throws off reliable cashflow, has net cash, and pays a 5% dividend, so lots to like there.

The resource sector is on my radar because there seems to have been a general sell-off, as if hot money was vacating the sector, in order to chase the bull market in non-resource sector small caps which we have enjoyed for the last six months.

We know there's tons of dross in the resources sector, but there might also be some good companies left behind, and I'm only looking at producers with real cashflows, not the "hole in the ground with a liar standing next to it" type of exploration companies.

Goldplat say that they have made an operating profit of £2m in the six months to 31 Dec 2012, and are commencing an own share buyback programme for up to 10% of their shares, which should help enhance EPS, and take out some loose holders.

Cash has dropped from £4.6m to £1.95m, which seems to be due to a similar-sized increase in debtors, which look a little too high at £7.1m, so I need to look into these accounts in more detail. But on the face of it, they look good value on a PER of about 6, with net cash, and paying a divi.

Whilst everything else has been going up in price, focusing on the sector where prices have been going down seems a good idea to me, as the price chart of Goldplat (LON:GDP) demonstrates, just on a simple BLASH basis (Buy Low And Sell High).








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Am pretty sure I mentioned last week that the overhang has cleared in Begbies Traynor (LON:BEG), the only quoted insolvency practitioner. Caledonia Investments was unwinding a large stake, but have now fully exited. BEG issued an in line Q3 trading statement last week, so with a PER of 6, and a dividend yield of 6, that's worth a look. The long debtor book & associated bank debt put some people off, but personally I accept those as being par for the course with this type of business. They inevitably build up a long debtor book, which is then paid when creditors meetings approve the fees. The Bank is usually the main creditor, so it goes through on the agreed charging basis.


Tangent Communications (LON:TNG) has issued an in line with expectations trading update for the year ending 28 Feb 2013, which would put them on a PER of about 16 based on 0.62p forecast EPS. Not cheap enough to spark my interest, and the activities they mention in the statement today sound low margin stuff (online printing, e.g. Goodprint, who I might have used for cheap business cards?).


Results from Sagentia (LON:SAG) look interesting, since they appear to have a particularly strong balance sheet, which regulars will know always appeals to me, because asset-backing typically limits the downside on any investment. Earnings can vanish if something goes wrong, but assets usually cannot (providing they are insured).

Sagentia has a market cap of about £37m at 96p a share, yet has £19.2m in gross cash, which nets down to £12.9 after bank debt (an apparently inefficient structure, holding large cash balances earning nothing in interest, at the same time as paying interest on borrowings?). There is also some deferred income, as is often the case with companies which hold large cash balances, i.e. money received up-front from customers.

They also seem to own lettable property bringing in £1.4m p.a. in rent, called Hartson Mill, although they note that 25% of the space is currently vacant and being marketed. Bear in mind downward pressure on rents.

So from my very quick review, SAG appears to offer a good mix of property, cash, and a profitable core business too. Could be worth a more detailed look?


Interim results to 31 Dec 2012 from Tristel (LON:TSTL) look pretty ropey. They supply hygiene products, and have quite high gross margins, so a fall in sales has correspondingly dropped through to the bottom line. A £2m exceptional item takes them to a £2.7m operating loss, following what they call a "root and branch review" of the business. It seems to me that the shares are a bet on newer products doing well, which is not something I feel qualified to form a judgment on, so will pass on this.


I see that Debenhams (LON:DEB) shares are down 9% today on a disappointing H1 trading update. That seems a rather harsh market reaction, given that the snow only affected 2 weeks trading, and is clearly a one-off factor. That said, I'm not interested in looking at the retail sector right now, because household disposable incomes are likely to be tightly constrained for the foreseeable future, and valuations are not attractive enough to reflect that.

(Edit: interesting to note critical comments on Twitter, saying that DEB blamed the snow for poor trading, whilst John Lewis barely noticed it. Interesting point!)

OK, that's it for today. It should be very busy for the rest of this week & next week, as we hit the really busy small cap reporting season for 31 Dec year ends. So do check back every weekday, as I won't be taking any time off for a while!

Regards, Paul.

(of the shares mentioned today, Paul has long positions in CAP & BEG, and no short positions)

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Tracsis Plc is a United Kingdom-based company that specializes in solving a variety of data capture, reporting and resource optimization problems. The Company’s products and services consists of: Software: Industry strength resource optimization and rail management software, Professional Services: Consulting and technology related professional services across the operational and strategic planning horizon, Remote Condition Monitoring (RCM): Technology and reporting for critical infrastructure assets in real time and Data Capture and Analytics: Collection, collation and analytical services of traffic and passenger/customer data within rail, traffic and pedestrian rich environments. It has contracts with operators within the rail and bus industries. Its subsidiaries include R.W.A. Rail Limited, Peeping Limited, Safety Information Systems Limited, MPEC Technology Limited are few of the company’s subsidiaries. more »

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Clean Air Power Ltd is a United-Kingdom based manufacturer of natural gas powered trucks. The Company’s Dual Fuel technology works by allowing heavy duty diesel engines to run primarily on natural gas, with diesel acting like a liquid spark plug. Minimal changes are required to the standard diesel power plant. Efficiency comes as standard with Dual-Fuel, with trucks running on up to 90 percent natural gas. This technology has been applied on DAF and Mercedes-Benz engines and will form the core of any Dual-Fuel application to an engine with Original Equipment Manufacturer cooperation. Products include hydraulic valves, gas injectors, shut off valves, coalescing filters: natural gas components and filtration components. more »

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Goldplat plc produces and explores precious metals on the African continent. The Company has two main business areas: the production of precious metals, primarily gold from materials acquired from primary produces and the mining of and exploration for gold. The Company operates in three segments: Recovery operations, Mining and exploration and Administration. The Recovery operations include the recovery of precious metals from metallurgical challenging materials and the processing of ore, sourced from other mining operations. Mining and exploration includes assets held for commercial exploitation of precious metals and exploration assets held where the commercial viability of the ore resource has not yet been evaluated or is in the process of evaluation. Administration includes activities conducted by holding companies in relation to the group and its subsidiaries. more »

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7 Comments on this Article show/hide all

Asagi 4th Mar '13 1 of 7

Begbies Traynor (LON:BEG) issued an in-line trading statement last week (here).

According to the Stocko page, forecasts are for 5.65p of EPS for 2013 (up from 5.62p in 2012). The dividend is forecast to come in at 2.2p per share.

That means Begbies trades on a 2013 P/E of 6.7, with a yield of 5.8%.

The other important thing to note here is that Begbies has an APRIL year-end. This means that the trading statement was issued with just two full trading months of the year remaining.

The market normally reserves ratings like Begbies' for companies that are going backwards, or whose future earnings are highly uncertain. This isn't the case with Begbies Traynor (LON:BEG) however, as EPS GROWTH is forecast and the final result is almost in the bag.

There's another reason to expect the shares could recover significantly and that is the insolvency cycle. Check out this article in the Independent this morning:

"UK firms are going bust at the slowest rate since the heady pre-credit-crunch era of 2007, credit checking company Experian said today."


"The figures inevitably raise concerns over the number of unviable 'zombie' companies unable to pay off borrowings and being kept alive by rock-bottom interest rates and forbearance by banks unwilling to write off loans.

Many experts, including some Bank of England rate-setters, fear these companies are draining scarce bank credit from more viable companies."

significant because for the first time since the credit crunch, it seems that policymakers are acknowledging that the economy may need more insolvencies. That is a good signal for a company like Begbies Traynor (LON:BEG).

Before the recession, Begbies' net profit was around 50% higher than it was for 2012.

So, we have a company on a bargain valuation at what may be the very low of the cycle. As Paul has pointed out recently, that bargain valuation may have been caused by the judgement of just one individual, the portfolio manager at Caledonia. Now that he/she has finished selling we will have a more normal balance between buyers and sellers of the stock.

Asagi (long BEG)

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Paul Scott 4th Mar '13 2 of 7

In reply to Asagi, post #1

Morning Asagi,

That's a good summary of the pertinent facts re Begbies Traynor (LON:BEG), thanks.

And to reiterate your points, whilst I can understand why the Govt initially wanted to limit the rise in unemployment in 2008, by preventing Banks & HMRC from making companies insolvent, there seems little doubt now that this process is holding back the economy. Think of all the shops, bars, restaurants, etc, which are clinging on for survival only, but will never be able to repay their bank debt. They just get more & more run-down, as they cannot afford to invest in refurbs, etc. Whereas in the long run it would be better for the economy and arguably the borrower too, to just draw a line under it & move on, giving up the asset to a new owner who can invest in it, at a lower rent, thus triggering the creative cycle of economic growth all over again.

BEG should see much more buoyant market conditions for years to come, once these politics are reversed, and with a starting valuation of a PER of 6 on low point in the cycle earnings, that could give upside of 2-3 times the current share price in my view, and a 6% divi yield whilst we wait.

So I completely agree with your post. The downside risk is that they lose control of debtors, and end up having to take a bad debt hit. There's nothing to suggest that might happen but you never know. A long debtor book is a heightened risk, but it's unavoidable for insolvency practitioners.

Regards, Paul.

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SevenPillars 4th Mar '13 3 of 7

Goldplat does look interesting, especially if the share price is finding support at the 11p level. From a technical point of view it does seem to have reached that low and, at least for now, bounced around it. Would want to see some leveling off from here and a bit of positive direction on the chart. Still, it has sold off a long way from its high and does look cheap (famous last words!).

On Begbies, is it possible that market sentiment sees this as a company that should do well out of bad times, but if you are pricing in recovery and better times to come, rightly or wrongly the market sees less opportunity in picking up insolvency work? Just a thought as like Goldplat it does look cheap. Other than sentiment it is difficult to see why the market is overlooking it.

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thekingsgambit 4th Mar '13 4 of 7

Hi Paul,

I am really enjoying your blogs. Keep up the good work. FWIW, I have posted my analysis on TRCS (my NFSC share comp entry) here:-

Thanks and regards


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snickers 4th Mar '13 5 of 7

I hung on to Goldplat for an age, waiting for the disfunctional Kenyan bureaucracy to approve their first mine. If they had stuck to only their recovery plant operations they'd have been paying fat dividends for some time. Evidently I'm still rankled. Mine #1 is still a deadweight it seems:
"It must be noted that the improved results from the gold recovery operations are expected to cover the losses at Kilimapesa, leaving operating profits for H1 2013 in line with those of the comparable period in 2012."
And they've opened up on other fronts too. But I'm interested that they plan a dividend now.

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DarwenLad 5th Mar '13 6 of 7

In reply to Asagi, post #1

My main reservation about Paul's long-term bullish case for BEG is related to who has been buying the 15% plus of the company sold by Caledonia over the last six months. As far as I can see there have been no RNS announcements of new stakes in BEG over the period that CLDN has been selling.

Currently, BEG has a small group of oddball institutional shareholders whose names I do not recognise. If BEG has such a bright long-term future why has it not attracted the attention of some well known small-cap instututional investors? Based on its lowly p/e and above average yield BEG looks attractive on paper. My enthusiasm for BEG would be much greater if one or two well known names were to join the share register.

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Asagi 5th Mar '13 7 of 7

Management own a large amount of shares in the company, that will deter some institutional investors. It also leaves fewer shares free for them to buy. As a result, Begbies Traynor will appeal to fewer organisations.

I imagine that the 'obscure' institutions that you mention are holding the shares for a small number of private clients : people or companies.

As for the absence of 'big-name' corporate investment intermediaries, why do you want them to steer your investment decisions?

Begbies Traynor (LON:BEG) is one of the few cheap shares remaining following the bull run in equities that started in 2013.

I am sure there are plenty of investors that will fancy it. Some may be waiting for the company to announce its next results, they could be too late, but it is certainly a staging post.

If the company confirms earnings close to 5.65p and a dividend of 2.20p with its finals we will be trading far ahead of today's price, I am sure of that.

Add in increasing noises that the economy needs banks to recognise its losses and for 'zombie' companies to be taken out of circulation and things are looking pretty positive for Begbies today.

Asagi (long BEG)

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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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