Small Cap Value Report (10 Dec 2015) - SNX, LAKE, POS

10th Dec '15 by Paul Scott

12 comments 16586 reads

Good afternoon!

I'm running late today, so will be updating this report until mid to late afternoon.

Synectics (LON:SNX)

Share price: 123.75p (up 17.9% today)
No. shares: 17.8m
Market cap: £22.0m

Year end trading update - this CCTV company has an unusual 30 Nov year end, so it updates today on the full year that has just finished.

key points;

Consolidated revenues for the year just ended are estimated to have been approximately £68 million, compared with £64.6 million in the previous year. Underlying results are expected to be in line with market expectations.

In recognition of Synectics' return to profitability (subject to audit), the Board intends to recommend a modest resumed final dividend in respect of the 2015 financial year.

Net cash at the year end was approximately £0.3 million, a substantial improvement from net debt of £(6.1) million at the prior year end. This cash inflow reflects primarily the unwinding of abnormally high working capital balances caused by project delays and disruptions in the oil and gas sector during 2014.

This is all very encouraging in my opinion, as the company was looking close to a basket case, and had a distinctly stretched balance sheet a while ago - in particular, alarmingly high debtors, and mounting bank debt.

It seems as if the company has now fixed those issues, and got its balance sheet back under control. A resumption of divis is also very encouraging, even if only a modest amount.

So the sharp rise in share price today looks fully justified.

The perception is that Synectics has big exposure to the oil & gas sector, but the company comments today that it was just under 20% of 2015 revenues, so not as big an exposure as I thought.

My opinion - it's probably not a share that I would rush out to buy, as the outlook comments don't sound particularly encouraging. Also, it's only operating slightly above breakeven at the moment, so it remains to be seen if a more robustly profitable business can be created, or not.

However, it's apparently no longer a dangerously risky share, so I'm today taking it off my Bargepole List (it was added at 335p on 29 Jul 2014, so has since dropped 63%, so that was a good call). It's pleasing to see companies remedy significant problems, and return to better financial health, without diluting existing…

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imranawan

10th Dec '15

Hi Paul

Thanks for the write-up of Lakehouse (LON:LAKE). Note 3 to their accounts provides a summary of the exceptional items. As you say half of these are related to amortisation of acquired intangibles and half of the remaining exceptionals relate to IPO costs. I agree we should be critical and sceptical of new floats but each one has to be assessed on its own merits.

Disc: I have a long position, and am surprised the SP hasn't really moved, so suspect there is an overhang. The strong cash generation is what first attracted me and they've made a couple of acquisitions since they've been listed.

Regards,
Imran.

Rusty2

Paul, Thanks for the Lakehouse (LON:LAKE) report. I do have a holding in them, the figures looked good, surprised the shares went down. I think they are a different company from ISG (LON:ISG) who were more shopfitters. I don't know their margins, will see when Stockopedia updates its figures, the nearest company to them I would say is Bilby (LON:BILB) but they are more private sector. Yes things can go wrong, I believe thats what happened with the Hackney council contract. Anyway thanks for the insight into the balance sheet. I will hold for now.

kenobi

I wonder if this great turnaround for synectics means anything for IND which has been in the doldrums for some time ??

fek47

Paul, I think you need to look at the acquisitions that Lakehouse (LON:LAKE) has made since IPO to fully understand the investment proposition - and to bear in mind the clear intention to continue making bolt-on acquisitions in the future indicated by the £45m revolver facility with is referred to in the accounts.

Paul Scott

Hi fek47,

The company making debt-fuelled acquisitions is not something I see as a positive at all, quite the reverse, as it will just mean that NTAV slips into the red, and net debt rises (it's already in a debt position, if you treat deferred consideration as debt). Who knows what skeletons the acquired companies will have in their closets? Problem contracts could reside in those, which might then trigger problems with the group.

If & when it does run into some problems, there won't be any balance sheet strength to steady the ship.

You've got to remember that the people selling their companies to Lakehouse are only doing so because they (the vendor) think they're getting a good deal. It's unlikely that both the buyer and vendor are both getting a good deal.

Overall, I'm very sceptical of groups that grow by acquisition, because in most cases, it ends up going wrong. Although there can be a honeymoon period when the shares are fashionable, and there might be an opportunity like that with Lakehouse, i.e. to buy now whilst they look cheap, hold for a while, then sell up before the wheels come off.

It would be good to meet management, and ask them all about risk control, etc.

I can see the attraction of the low PER, and the forecast divi yield. I hope it works out for you, and I might yet be tempted to pick up a few as a small position, but I would never have a contracting company as a big holding - they're just far too risky.

Regards, Paul.

grout123

11th Dec '15

HI Paul.
Regarding Plexus
I see that you have a long position in this and I am keen to understand you rationale for holding a share with
Stockrank of 16
p/e ratio of 81.7
div yield of 0.8
and operating in the oil and gas sector
This isn't intended to poke a hole in your strategy but I am genuinely interested in the reasons you see for holding this share if I might ask. Thanks

gus 1065

Hi Grout123,

I'll defer to Paul to give you a direct answer, but if you look at his write up of October 28th you'll see why notwithstanding the Stockopedia rankings, Paul rates it as a speculative super stock.

Gus

Thanks Gus. Yes good idea to wait to see what Paul says. But while we are waiting and as you are picking random comments out of his commentary I will do the same then;
1-Overall, I think it's entirely possible that this share could drop more, maybe considerable more, who knows? But personally I'm happy to hold it for the long-term,
2-Speculative to a certain extent, but a very interesting share for the long term, in my view.
3-how on earth do you value it? PER isn't particularly helpful, given that the company is serving a sector which is enduring a very low oil price - which must have some negative impact on Plexus.

Indeed. I'm not sure conventional valuation metrics do it justice.

I guess the $64m question is "have they invented (and patented!) a better mouse trap" that will clean up in the O&G sector as and when Capex inevitably starts to flow again. If they have then you could maybe try and ascribe some kind of DCF to guesstimated future sales and margins using a pretty hefty risk adjusted discount rate but hardly an exact science.

Alternatively, take a speculative and affordable punt, lock them away in a bottom draw and hopefully get a nice surprise sometime in the future.

I may also put a few bob of my "mad money" in and see how it goes.

Gus.

Ramridge

Re. Plexus Holdings (LON:POS) Plexus have been trying to flog their POS-Grip product for as long as I can remember, certainly over 2 years. The fact that customers haven't exactly queued up to place orders doesn't fill me with confidence.

simoan

I like the ticker, POS. Maybe it's trying to tell us all something about the product :-)

12th Dec '15

Ha. !

Small Cap Value Report (10 Dec 2015) - SNX, LAKE, POS

Synectics (LON:SNX)

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Paul Scott

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