Small Cap Report - PLA, NFC, DLC, SPO, NWF, CFX, MWG, CCT, TCG

Tuesday, Jan 29 2013 by

Plastics Capital (LON:PLA) is a company which I follow closely, as myself and David Stredder interviewed the CEO 6 months ago. My impression was (and remains) that this is a good quality, niche company, well managed, but with a tad too much debt (albeit being reduced steadily). Growth has proved somewhat elusive in recent years too. Incidentally, we would like to do more interviews (of quality companies only!), but so far we've found that the ones we would like to interview seem camera-shy! Such is life.

Their Q3 trading update today (PLA has a 31 March year end) is "broadly in line" with market expectations. Broker consensus is for 11.6p EPS this year, so that corresponds to a PER of 6.3, which looks cheap.

Net debt was £8.6m when last reported at 30 September 2012, which is equivalent to about 31p per share, so adding that to the share price of 72p takes us up to 103p Enterprise Value, and a cash/debt neutral PER of 8.9.

I know this is a crude way of doing things, since it doesn't adjust out interest cost from the EPS figure, but it's a quick & easy way of getting to an estimate of how the PER really looks once you adjust out the net debt, which I find very useful.

I believe that PLA might gradually re-rate as the debt steadily reduces, so whilst the shares are unlikely to set anyone's portfolio on fire, they might prove a useful long-term holding? The dividend is forecast to grow from 1.3p to 2.0p this year, so if that happens, then the yield will be starting to matter at 2.8% yield.


There has been a flurry of trading statements from marketing groups lately, and today it's the turn of Next Fifteen Communications (LON:NFC) to give an AGM trading update for the period from 1 August 2012, which I'm pleased to see they have issued before the actual meeting, so everyone has a chance to read and digest it simultaneously, before the market opens. This strikes me as best practice, and really all trading statements should be issued at 7 a.m. for all companies. Intra-day profits warnings are every investor's nightmare, as it's just a race for the exit, won by whoever happens to be at their screen and see the news first.

The tone seems upbeat, but towards the end of the statement there is a veiled warning that H1 will be "held back" by "planned investments ... and staff transitions". So just to translate that out of marketing speak and into plain English, I think that means their costs have over-run, and they've made some staff redundant.

Although they do confirm "management targets" for the full year are expected to be met. As usual one has to assume that management targets are the same as market expectations, but they might not be, so this introduces a nagging doubt. It's much better to refer to market expectations, then there is no ambiguety, and it's easy enough to look up what the house broker has put out to the market in forecasts.

All in all, unpicking this RNS and working out what it really means, I would say it's probably slightly negative, to neutral. Their forecast PER is 9, and the dividend yield 2.6%. With net debt fairly low, at £5m (versus a mkt cap of £59m) this company looks priced about right, although the whole sector of small marketing companies seems pretty good value to me, given that a cyclical up-turn has yet to be priced-in. I also like the way NFC are concentrating on digital marketing (e.g. social media), which is clearly a good growth area to be in.


Delcam (LON:DLC) gives a refreshingly clear & crisp trading update (a refreshing change after all the flannel from Next Fifteen Communications). They state that revenue is expected to be at least £47m, and profit before tax is expected to be approximately £5m, after £0.4m charges for share options & pensions.

That appears to be pretty much bang on forecast, and puts the shares on a hefty PER of 20 based on forecast 57.1p EPS, and a share price of 1137p (£90m mkt cap). The company and its shares have done tremendously well, so it's difficult to see further upside in the short term at least. If I held, I'd be inclined to top-slice, or sell out completely at this valuation, but that's just a personal opinion.


Quite an interesting RNS from Sportech (LON:SPO) this morning. It's a £146m mkt cap gambling group.

The shares look to be a gamble too, since they say that a £40m (over £80m with interest) VAT repayment claim is to be decided at a Tribunal in February 2013. That's potentially over half the entire mkt cap of the group, which relates to its "Spot the ball" game from 1979 to 1996. Without knowing the details of the case (which might make you an insider) this makes the shares a complete gamble, so rules them out for me until this matter is resolved either way. However they do say that trading has been in line with the Board's expectations for 2012.


I last reported on NWF (LON:NWF) on 14 August 2012, and was underwhelmed by their poor results for y/e 31 May 2012, although I liked the decent dividend yield. It's a low margin distributor of oil, groceries, and animal feed.

Their interim results today look better, with basic EPS up 29% to 3.6p for the 6 month period to 30 November 2012, an unchanged interim dividend of 1p, and most strikingly, net debt has fallen a whopping 53% to £13.7m. This has been achieved by better managing working capital levels, they state. I wonder if this is a one-off, since the Balance Sheet after all is only a snapshot on one particular day of the year, and working capital can be window dressed to produce a favourable result for the balance sheet date, which may not be typical throughout the year?

Finance cost in the profit & loss account has remained unchanged at £0.6m for the 6 months, so that gives £1.2m interest cost for the full year, which at (say) a 5% interest rate, would imply average net debt of around £24m. Therefore I suspect that rather than being an unusual spike (as they suggest in the narrative), last year's net debt of £29.3m at 30 November 2011 is possibly nearer to the average throughout the year than the net debt of £13.7m at 30 November 2012!

The all important outlook statement is in line with expectations. Note there is a hefty pension deficit of £16.9 on the balance sheet though. Forecast EPS of 9.5p for this year (ending 31 May 2013) puts it on a PER of 12.7, which doesn't look good value at all to me, for a low margin, mature business, with a fair bit of debt, and a pension deficit. The 4.2% dividend yield is positive though.


Fabric & wallpaper group Colefax (LON:CFX) reports interim results to 31 October 2012, which look a tad disappointing. EPS was forecast to grow 11% this year to 17.5p. However the interims show EPS has fallen from 9.9p to 8.8p in H1. The Chairman appears to be a cheerful man, as he comments in the results narrative that these results are "broadly in line with expectations", and that he is "cautiously optimistic" despite "extremely challenging" trading conditions.

I don't share his cheerfulness, because in my world an 11% fall is not broadly in line with an 11% forecast rise! Although in fairness, the £120k cost of a tender offer has played a part in that. Seems an awfully large cost for essentially writing a few cheques. Probably would have been more cost efficient to declare a special dividend, or do a share buyback.

Despite the tender offer, CFX still has a strong balance sheet, with £5.6m in net cash, equivalent to 40p a share. So if H2 is the same as last year at 6p, then they are heading for about 15p EPS for the year. It's difficult to justify a rating of more than say 9 times, on a cash neutral basis, which gives 135p, plus the 40p net cash, takes me to 175p as my estimate of what the shares might be worth on current performance.

They actually cost 240p, so seem over-priced to me.


Modern Water (LON:MWG) seems to be a heavily loss-making story stock, so doesn't interest me. They report net cash remaining of £5.7m. The mkt cap of £33m is entirely based on future hope, so not my cup of tea thank you.


Toy company Character (LON:CCT) has an interesting chart - every three years the share price collapses, then rises for 18 months, and then collapses again!

They have issued a trading update today, ahead of their AGM at 11am. It scores top marks for delivering bad news in a positive sounding way - marketing companies could learn a thing or two from the toy sector, it seems!

Interim results to February 2013 are expected to be "disappointing", however they expect a "major lift in sales" in H2, which means they have confirmed market expectations for the full year ending 31 August 2013. Checking the forecasts, they are only for breakeven this year, hence the shares don't appeal to me. It's just too erratic a business, hence very difficult to value.


Finally, I am staggered by the huge rise in Thomas Cook (LON:TCG) shares. Does nobody even bother looking at balance sheets any more? This is the worst balance sheet I have ever seen, and all the profit is absorbed in paying interest cost. Net tangible assets are negative by £2.7 billion! In my book, that is insolvent, with the whole business being financed by debt, its suppliers, and advance payments by customers.

Good luck to people who are making money on the shares, but based on the balance sheet, in my opinion you're gambling, not investing! A big Rights Issue looks essential at some point.


I encourage feedback & discussion on articles here, so please feel free to use the comments section below, and I'll try to answer as many points as time permits, although I'm out & about in London for the rest of today, but will check the comments tonight on my return home.

As a quick aside, thanks again to everyone who has kindly sponsored my DryAthlon - I have genuinely not touched a drop of alcohol since 29 December, and greatly appreciate the donations to Cancer Research in support of this project by you. The training runs are also going well for my Half Marathon on 17 Feb, and I managed a 10.6 mile run on Sunday, so getting there, and sponsorship for that has also been amazing, so thank you again!

Regards, Paul.

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


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Plastics Capital plc is a holding company. The Company, through its subsidiaries, is engaged in the manufacture of plastic products. The Company operates in two segments: Packaging, which includes packaging consumables and film packaging; and Industrial Products, which includes hydraulic hose consumables and plastic rotating parts. The Company's operations are based on the six operating businesses, namely BNL (UK) Limited, which manufactures plastics rotating parts; Palagan Limited, which makes film packaging; C&T Matrix Limited, which makes the packaging consumable of creasing matrix; Bell Plastics Limited, which manufactures hydraulic hose consumables; Beijing Higher Shengli Printing Science and Technology Co Ltd, which also manufactures creasing matrix, and Flexipol Packaging Limited, which makes film packaging and bags. more »

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Next Fifteen Communications Group plc is a United Kingdom-based communications company. The Company consists of 16 subsidiary agencies, spanning digital content, marketing, public relation (PR), consumer, technology, marketing software, market research, public affairs and policy communications. The Company's 16 marketing businesses include five independent communications brands, with three specializing in the technology sector (Bite, Text 100 and The OutCast Agency) and two in the consumer space (Lexis and M Booth). The Company's three agencies focuses on digital (Beyond, bDA and Connections Media), a programmatic advertising technology business (Encore), two market research companies (Redshift Research and Morar), two digital content marketing agencies (Republic Publishing and Story), a policy communications firm (463 Communications) and an investor relations consultancy (The Blueshirt Group). more »

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Delcam Ltd, formerly Delcam plc, is a United Kingdom-based technology company. The Company is engaged in the supply of computer-aided design /computer-aided manufacturing (CAD/CAM) solutions for the manufacturing industry. The Company’s operates in 4 segments which include Advance manufacturing products, healthcare solutions, footwear solutions, and artistic solutions. The Company’s products include; Power Mill-engaged in providing 2, 3 and 5 axis software; PowerSHAPE provides a solution for both product design and toolmakers; PowerINSPECT delivers inspection of complex parts and tools by comparing the manufactured item with the third dimension (3D) CAD model, among others. more »

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  Is Plastics Capital fundamentally strong or weak? Find out More »

7 Comments on this Article show/hide all

Asagi 29th Jan '13 1 of 7

Hi paulypilot,

Plastics Capital (LON:PLA) reported at 24% decline in net debt with the last interims and an 18% decline with the prelims before that.

In two years, the reported headline net debt figure has come down from £14.9m to £8.6m.

Management are doing EXACTLY the right thing here. They are going big on debt reduction and slowly introducing a (rising) dividend at the same time. The first should be very good for the P/E and the second should work wonders for perceptions about the company as an investment proposition i.e. management are in control and are rewarding shareholders.

Stockopedia data sheet says the P/E is 6.25 for 2013 (March). That seems a bit mean considering the clear progress that the plc is making. Also a good economic recovery play.



no position

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Paul Scott 29th Jan '13 2 of 7

In reply to Asagi, post #1

I agree. To my mind, the share price of Plastics Capital (LON:PLA) is likely to gradually rise to say 100p as the debt is reduced over 1-2 years.

Then you might get a further re-rating when/if profits show some growth from an economic recovery.

Management are competent, and sensible, although there is a question mark as to why it needs all the plc costs at all - it's a lot of expense (around £600k p.a.) to have an unnecessary layer of senior management doing little more than twiddling their thumbs.

Regards, Paul.

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loglorry 29th Jan '13 3 of 7

Re PLA interview. I've never been big on the talking to directors directly approach to finding out what is going on. The ones that agree to do it are probably using it as a way to promote their stock and so I'm instantly wary of that. The ones with good businesses can just let the numbers speak for themselves and focus on running the business.

FWIW I think meeting management via internet vids or mello events can produce bad investment decisions. If you take the time to listen to a persuasive pitch by a director in person you are probably more likely to buy into their story. Unfortunately, it seems to be the ones that spin fiction that are most likely to participate in these types of storytelling. Also lots of legal reasons why a director can't "spin" in an RNS or set of audited company results whereas an informal chat is a different story. Harsh perhaps and just my view but I'd rather focus on the numbers and other external validation metrics. Just my 2p not a criticism of the effort that has gone into setting up these vids and events.

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Dan Green 29th Jan '13 4 of 7

I agree with your assessment of Thomas Cook. I have sold out today after banking 50% profit in two weeks. Maybe it has further to go and there is momentum, however it is clearly speculating rather than investing. I feel much more comfortable with long term holds and this is the first time I have traded. Although it has proved profitable this time, I can see how you can easily lose money. Thomas Cook doesn't offer a margin of safety and the first objective should be to not lose money.

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DarwenLad 29th Jan '13 5 of 7

In reply to loglorry, post #3

I don't agree. It is great if you can have one and one chats with company execs but for most people this is well nigh impossible. We cannot get access to the company management briefings with institutional investors, and it is hard to get into AGMs if you are not a shareholder. Of course, there are some canny investors who can get all the information they need from reading the annual report and RNS announcements. But I think there is a lot to be said to having a look at a company (especially if it holds its AGM at its HQ) and watching how management responds to questioning. Of course, they may be bull shitters and some who are keen to "spin" a special line. But investors should always keep this possibility in mind when digesting management's performance in front of the cameras or in public.

I am kicking myself for not attending Nanoco's AGM in Manchester just before Christmas. I had made 40 per cent on the shares in a few months, and felt it was about time to take a profit after they touched £1.

I know that Nanoco's management would not have told me they were just about to sign a manufacturing deal with Dow (which has sent the shares up another 50 per cent plus) but I think I would have been better able to guage the calibre of the management and whether it was worth sticking with them as a long term investment rather than a short term trading play.

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Paul Scott 30th Jan '13 6 of 7

In reply to DarwenLad, post #5

I can see both points of view on this - some investors like to meet management, and make better decisions as a result, whereas others can be too trusting, and get sucked into buying and/or holding a bad investment because they fell in love with the story after meeting management. I've certainly done that in the past, but I've met so many companies now that I'm developing a much better nose for these things, and reject the shares of almost all companies I meet.

It can certainly stop you selling at the wrong time, if you meet management and realise that they have a credible plan for developing the business. That's very much why I have stuck with Indigovision (LON:IND) since I have been so impressed with the turnaround strategy of the new CEO, and his intense focus on the job, and absolute determination, which you only really get a handle on by meeting the person (or maybe from a phone call).

Bottom line is, it's horses for courses. Whatever works for you personally is the right way to go.

Cheers, Paul.

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loglorry 5th Feb '13 7 of 7

I know that Nanoco's management would not have told me they were just about to sign a manufacturing deal with Dow (which has sent the shares up another 50 per cent plus) but I think I would have been better able to guage the calibre of the management and whether it was worth sticking with them as a long term investment rather than a short term trading play.

Just sounds like a bit of hindsight thinking to me. So what you are saying is if you had done something that might have led you to be impressed by management (not sure why you are sure they'd impress you) this might not have meant you would have sold and thus you'd be sitting on a bigger paper gain right now?

This is all just coulda woulda shoulda stuff but as yet we've not invented a time machine and so its largely irrelevant. I could construct the same future where you didn't sell went to the presentation then decided to sell. Or you didn't sell went to the presentation were impressed and then the share price dropped and you sold lower.


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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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