Small Cap Value Report (13 Aug) - TRB, SWJ, WTL, CGS

Tuesday, Aug 13 2013 by

Good morning! It's very quiet for news this morning, so this will be a comparatively brief report. The Futures are indicating the open should see the FTSE 100 Index up 15 points at 6,589.


Tribal (LON:TRB) issues its interim results for the six months to 30 Jun 2013. The market seems to like them, as the shares have opened up 3% at 207p, which values the company at £194m. Tribal provides services to the education sector.

Turnover rose 12% to £62.1m, and adjusted operating profit rose 15% to £5.4m for the six months. Adjusted EPS rose 36% from 3.6p to 4.9p, but was flattered by an unusually low taxation charge this period. The company says that trading will be weighted towards H2, and the outlook statement sounds good, with them confirming "at least in line with our expectations for the full year".

So really it all looks good until we get to valuation. Broker consensus is 11.4p EPS for this year, and 12.4p next year, which look about right, if you normalise the tax charge. So the shares look expensive to me at 207p, which is a PER of just over 18 times this year's earnings. That's too expensive by far to my mind. Tribal has always been fairly cheap when I've looked at it before, and personally I wouldn't pay more than a PER of 12 for what is really a pretty ordinary business, that's been quite accident prone in the past.

The dividend yield is lousy, at only 0.7% forecast yield.

Furthermore, Tribal also has a weak Balance Sheet, with negative working capital (current assets are £36.0m, versus current liabilities of £53.3m), with another £19.4m of long term liabilities too. My internet is about to go down for a little while, as fibre optic man is here to upgrade us, so will continue when I am reconnected ...

... yes I'm back, and apparently 10 times faster!

Going back to Tribal's Balance Sheet, it has £77.6m in Goodwill, and further intangibles of £14.8m. Writing off both of these takes net tangible asset value down to minus £31.4m, which is not a good position at all. It might be fine for the time being, but what happens if they run into trading difficulties, as they have done in the past? There's nothing to cushion the impact.

I just cannot understand why these shares are rated so highly. Have I missed something?





Results from micro cap Scottish auctioneer John Swan and Sons (LON:SWJ) look poor. Their underlying trading (before pension adjustments) has gone from breakeven in 2011/12 to a loss of £344k in year ending 30 Apr 2013. Its property has been revalued, and the market cap of £2.8m is now less than half net tangible assets of £6.3m. Seeing as the assets are being unproductively used, that discount is entirely logical I would suggest.

They blame underperformance on the weather and, "Sheep were slow in coming forward and prices were down, which led to reduced commission". It just doesn't make any sense for a company this small to be Listed on the Stock Market.





Shares in Waterlogic (LON:WTL) have dropped sharply today, by 15% to 140p, on the back of a trading update. I don't recall having looked at Waterlogic before. The market cap has dropped to about £109m at 140p per share. They say today that revenues for the year ending 31 Dec 2013 are expected to be $120-125m, and that adjusted EBITDA is expected to be approximately $20m (up from $14.7m). Those numbers don't sound too shabby, but clearly are lower than the market was expecting.

They had an installed base of 640,000 machines at the end of 2012, so clearly a pretty substantial business. Looking back at the last set of full year results, 38.6% of group revenues were recurring (machine rentals & servicing) which is good.

Their Balance Sheet looked pretty good at 31 Dec 2012, with net cash of $29.8m.

Overall, I like the concept - of water purification machines to use in offices & public buildings, to replace conventional bottled water dispensers. The trouble is, with a profit warning today, and prior to that EPS estimates tumbling quite fast, there is clearly something going wrong with their business model. So I'd need to do more research on it, but it does look potentially interesting - mainly because of the recurring revenues, and a decent EBITDA forecast relative to the market cap.

Have any readers looked at Waterlogic before? If so, I welcome your views in the comments section below.





Shares in Castings (LON:CGS) are up 20p to 435p on publication of a positive trading update this morning. Broker consensus is for 36p EPS this year (ending 31 Mar 2014), so that puts them on a PER of 12, which is probably about right. The dividend yield is around 3%, and they have a tremendously strong Balance Sheet.

A very nice business, although a potential problem is flagged in the AGM statement today, when they say:


However we remain cautious of the potential impact of the new European emissions legislation in 2014 as previously reported.


So that would need investigating before buying any shares in this one.

As with so many companies at the moment, I can't help feel that there will be more attractive entry points in the future, it's so difficult to find value at the moment after fairly indiscriminate share price rises right across the small to mid caps space. Hence why I'm keeping some powder dry.



Nothing else to report today, so I shall sign off. Back tomorrow as usual.

Regards, Paul.

(of the companies mentioned today, Paul has no long or short positions)


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Tribal Group plc is a United Kingdom-based provider of software and services that support the management of education. The Company operates in four business segments: Product Development and Customer Services, Implementation Services, Professional and Business Solutions and Quality Assurance Solutions. The Company's Product Development and Customer Services segment represents the delivery of software and subsequent maintenance and support services. The Company's Implementation Services segment represents the activities through which it deploys and configures its software for its customers. The Company's Professional and Business Solutions segment represents a portfolio of performance improvement tools and services, including analytics, benchmarking and transformation services. The Company's Quality Assurance Solutions segment represents inspection and review services, which support the assessment of educational delivery. more »

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John Swan and Sons Plc is a United Kingdom-based company, which is engaged in auctioneers, livestock agents, valuers and estate agents and operates livestock marts in Newtown St Boswells and Wooler. The Company conducts sales of pedigree and commercial livestock and also provides a private sales facility either between farms or from farm to abattoir. Its services include rural and commercial estate agency, SFP entitlement trading, liquidation and insolvency sales, farm sales and cessation of business Sales, a variety of valuation work and fine art and antique Sales. The Company trades from two Mart facilities: Newtown st bosells and wooler mart. Newtown st bosells is the Livestock Centre servicing the entire South East of Scotland and situated in the heart of the Scottish Borders. Wooler mart is Livestock Market in the North East of England situated in the center of the renowned productive livestock rearing county of Northumberland. more »

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Waterlogic Plc is an Ireland-based designer, manufacturer, distributor and operator of point-of-use (POU) drinking water purification and dispensing systems. The Company's systems are used for environments, such as offices, factories, hospitals, hotels, schools, restaurants, home and other workplaces. The Company's products are distributed in North and South America, Europe, Asia, Australia and South Africa. Its products include Waterlogic 350 (WL350), Waterlogic 3000 (WL3000), Waterlogic 1000GF (WL1000GF), Waterlogic Firewall Tap, Waterlogic 2 Firewall (WL2FW), Ultraviolet (UV) Countertop Water Purifier-Waterlogic Firewall Cube, Waterlogic 3 Firewall, Waterlogic 4 Firewall (WL4FW), Waterlogic Max Firewall, Waterlogic 2500 (WL2500), Waterlogic 850HV (WL850HV), Waterlogic Station (WL Station) and Waterlogic 2000 (WL2000). more »

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  Is Tribal fundamentally strong or weak? Find out More »

4 Comments on this Article show/hide all

johnrosier 13th Aug '13 1 of 4

Paul I agree with you. I held this in JohnsInvestmentChronicle last year but sold out far too early. In at 60p out at 86p! Seems far too expensive but I guess the main thing it has in its favour is that it has seen fairly consistent upgrades to earnings over the last 18 months but may be that too has run its course.

We still own in an Investment Club I am a member of; I think I will give the sponsor a nudge!

ps Looking forward to FCCN trading statement; should be exciting one way or the other!

Website: JohnsInvestmentChronicle
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rick 13th Aug '13 2 of 4

Regarding Tribal.

It has undergone fundamental change in the business over the last 2 years, new management, new business model, new products. Sales and EPS have expanded and EPS forward visibility has improved dramatically. Couple that with products that are being taken to new (international) markets and winning new market share, my feeling is that a fundamental re-rating of the stock is underway. Also management are betting on share price improvement by putting money where their mouth is and the dividend is being increased (up 25% yoy) and this looks sustainable. All positive.

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johnrosier 13th Aug '13 3 of 4

When I put Paul's points to my investment club this morning by email I got one reply from someone with industry knowledge who agreed with the points rick has made. He also said "My insight is that they have only scratched the surface of a market that is primed for growth over the next few years. I have been partnering with xxx (a big multinational) and they have more enquiries than they can deal with on collaboration software in the education sector and I can see there are a wealth of opportunities there".

Share price momentum is good and valuation can stay high for longer when a fundamental change is occuring. Whilst I can understand people being nervous of buying at this valuation we have decided to hold on for the time being.

Website: JohnsInvestmentChronicle
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acdoug 13th Aug '13 4 of 4

re WTL; I looked at WTL back in Sept 2012, with the aid of an Edison Quickview, when it stood at 190 , but was put off by some serious sales at 200p at the time, and the fact that it looked overpriced cf peers/sector, and a silly PE (f, I think) of 158 (but going for great growth in 2013).
On 18.10.12 there was no real explanation, or reason, as far as i could see, why the CFO retired, after only a year.
Since then it seems to have foundered under its many and rapid acquisitions (a real risk that Edison pointed out), its profit has halved and ROC reduced from 10 to 2.6 (I haven't tried to work out the accounting reason why it hasn't halved like the profit).
The forecast for 2013 does not seem to have changed(?), gauging by the doubling of EPS, but today'sTrading Update is suspiciously short on profit comment.
All that said, the products (generated by Jeremy B-D's brother Jonathan in R&D? Why isn't he a director?) seem to be technically superior, and you might take the view that if they can digest the acquisitions the bottom line will eventually benefit.
That's just a quick look, but overall I don't like a 25 PE, and anyway I doubt the profit forecast.

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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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