Small Cap Report (8 Feb) - BYOT, IMTK, VNET, CNS, INL, TRCS, CUP

Byotrol (LON:BYOT) issues a "Commercial & Trading Update" - surely they are the same thing? Semantics aside, there is some good news and some bad. They have secured an agreement with Marks & Spencer for them to use Byotrol sanitisers across its UK stores, which are for surface hygiene. Overall revenue growth in the first 10 months (to date, since they run a 31 March year-end) have grown 15%.

On the negative side, this is slower growth than expected, due to delays in obtaining European regulatory approvals. It looks to me like this company is near the last chance saloon, as they are resorting to invoice discounting and cost control to take them to anticipated breakeven in H1 of 2013/14 (i.e. towards the end of this calendar year).

I note that the number of shares in issue has risen by a material amount each of the last 6 years, and that the company is permanently loss-making, so it is of no interest to me. A £12m market cap appears very generous, given the company's long-term commercial failure to date. Having turnover of £2m every year, and making a £2m loss every year is not business, it's charity. Expect a continuation of the 3-year down-trend shown in BYOT's price chart, once investors have got over the excitement of the M&S contract.

In a similar vein, I note that Imaginatik (LON:IMTK) shares plunged over 50% yesterday on news of it considering de-Listing its shares, reducing its market cap to just £2.4m (although that's still generous in my view). This is the reason I don't usually invest in sub-£10m market cap companies, or anything small which is trading very badly. The risk of a de-Listing is just too high, especially if they are loss-making, strapped for cash, and there is little liquidity in the shares.

We've seen in several cases how an intention to de-List will at least halve the share price, as many investors get out at any price, not wanting to hold unlisted shares. I have mixed feelings on this. Generally speaking, once a company has Listed, it should remain Listed in all but the most extreme circumstances. However, once it has become blindingly obvious that the business is going nowhere, then it makes sense to de-List and thereby strip out the considerable costs of maintaining a Listing, which various small caps have told me is circa £200k+ p.a..

We met the charming American CEO of Imaginatik at a Mello Central event last year, and he completely failed to convince anyone that he had a viable business, mainly because he doesn't! It just sits there & loses money every year, with lofty ideas about managing innovation for clients, etc. It's all waffle if you ask me, and there comes a time where people need to just accept that something hasn't worked, and move on with their lives.

As an aside, a couple of people flagged to me that these reports are difficult to read on smartphones and iPads, due to a large pop-up which can't be closed. I have flagged this to Stocko, and they are on the case, so the problem should be fixed in the next few days.

I was scratching my head as to why shares in Vianet (LON:VNET) (my second-largest holding) were up 8% yesterday on no news. One possibility being mooted is that tipsheet Small Company Share Watch listed it as one of their NAPS for 2013, but haven't yet done a write-up about it, so that might draw in their readers into buying on Monday. I don't know whether that's true or not, but it's another reminder that we're definitely in a bull market again, where rumours of newspaper & magazine tips are moving prices!

Shares in network security company Corero Network Security (LON:CNS) are likely to take a bath today, after they announce a £4m Placing of 27m new shares at 15p (a discount of 23% to last night's close of 19.5p, although the shares started dropping sharply just over 2 weeks ago, so presumably there's been some advance selling by people in the know? Or it might just be a coincidence, who knows?

What is interesting is that over two thirds of the Placing shares are being taken up by Directors and management. That's a pretty serious commitment of their own money, which should certainly motivate them to make this work. On the other hand, as set out in today's RNS, management are considered a Concert Party, and will hold 40.8% of the enlarged shares.So that puts then in a dominant position which could lead to a buyout on the cheap, although it should be noted that assurances have been published in today's RNS that their intention is for CNS to remain quoted on AIM.

I might look at this one again, as it's rare to see Directors stump up over £2m of their own dosh to support a fund-raising, so they clearly believe in the company.

 Special Offer: Invest like Buffett, Slater and Greenblatt. Click here for details »

I've been flagging up the value in Inland Homes (LON:INL) for some time now, as recently as yesterday's morning report. It seems that Investors Chronicle have jumped on the bandwagon now, and apparently have highlighted it today as a bargain share, which it is. The underlying NAV is probably around 35p a share, including unrealised gains on sites where planning consent has been achieved. They're up to 25p today, but personally I cannot see any reason for a discount at all, now that the housebuilding sector is buoyant in the South East, and larger builders need, and have the funding to buy land.

So Inland should do well, after a long period of under-performance since its IPO in 2007. Perhaps at next year's AGM we will be congratulating the Directors, instead of haranguing them about undeserved bonuses? Nobody minds paying bonuses when the shares are doing well, but their mistake was to dip their hands in the till for bonuses when things were going badly for shareholders.

Tracsis (LON:TRCS) have today announced that their crew scheduling software has been sold to a "major UK rail freight operator". This is interesting because it widens the market for their software, and also hints at potential in other transport areas - buses & coaches would seem the obvious one.

As the 12 month chart shows, TRCS seems to be taking a breather for the time being, after an excellent bull run.

After meeting management recently, TRCS is on my watch list, but I'm not ready yet to hit the buy button. Sustainability of earnings is the key unknown, so I would rather wait to see another couple of sets of results before taking the plunge. In my opinion 2012 might have contained some one-offs, and could be difficult to repeat, hence I don't want to base a valuation on a multiple of profits that might not be repeated, as that could mean over-paying. But the cash pile being almost a quarter of the market cap is a hefty buffer.

Shares in Cupid (LON:CUP) have really fallen out of bed in the last few days, and there are several things there I don't like - a 7-figure Director sale, and the business model seems to rely on heavy up-front marketing spend to generate enough new business (a bit like online casinos), which has the potential to unravel at any point if the latest marketing drive doesn't work. There are also question marks over whether the wooden & apparently scripted video testimonials from "customers" are genuine or not!

There is a forensic, and highly critical report on Cupid by Aubrey Brocklebank, which seems well researched, although I'm not commenting on the subject matter, draw your own conclusions. It certainly raises question marks over the comany's rating. I'm glad I steered clear of this one. It looked cheap, but something somehow just didn't smell right, and I remain of that view.

That's it for today. My Half Marathon attempt is looming, on 17 Feb, so any further sponsorships to my chosen charities (Sussex Beacon, and MacMillan Cancer Care) would be very much appreciated, and thanks again to everyone who has already sponsored me. I'm dreading it, but am determined to complete the course, even though I'm not expecting to be worrying any of the existing world record holders!

Regards, Paul.

(of the shares mentioned today, Paul has long positions in: VNET & INL. Paul has no short positions)