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

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)