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

4th Mar '13 by Paul Scott

7 comments 22032 reads

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…

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Asagi

4th Mar '13

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."

significantly:

"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)

Paul Scott

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.

SevenPillars

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.

thekingsgambit

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:-
http://boards.fool.co.uk/interims-out--12760094.aspx

Thanks and regards

Stuart

snickers

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.

DarwenLad

5th Mar '13

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.

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)

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

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Paul Scott

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